UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   -----------

                                    FORM 10-K
     Annual Report  Pursuant to Section 13 or 15(d) of the  Securities  Exchange
     Act of 1934

     For the Fiscal Year Ended December 31, 2001 Commission File No. 0-19301
                                   -----------

                     Communication Intelligence Corporation
             (Exact name of registrant as specified in its charter)

                    Delaware                       94-2790442
                    --------                       ----------
         (State or other jurisdiction of        (I.R.S. Employer
          incorporation or organization)        Identification No.)


    275 Shoreline Drive, Suite 500
      Redwood Shores, California      (650) 802-7888             94065
     --------------------------       --------------             -----
       (Address of principal      (Registrant's telephone      (Zip Code)
         executive offices)     number, including area code)



           Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock, $.01 par value
                          ----------------------------
                                (Title of Class)

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

Yes X   No
   ---    ----

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference  into Part III of this Form 10-K or any  amendment to
this Form 10-K.

     The  aggregate  market  value of the voting  stock  (Common  Stock) held by
non-affiliates  of  the  registrant  as of  March  25,  2002  was  approximately
$97,923,618  based on the closing sale price of $1.08 on such date,  as reported
by the Nasdaq SmallCap Market.

               The number of shares of Common Stock outstanding as
                       of March 25, 2002 was 91,060,436.

   A list of Exhibits to this Annual Report on Form 10-K begins on page 25.

<PAGE>

                     COMMUNICATION INTELLIGENCE CORPORATION

                           ANNUAL REPORT ON FORM 10-K

                      FOR THE YEAR ENDED DECEMBER 31, 2001

                                TABLE OF CONTENTS


                                                                          Page

PART I................................................................        3
Item 1. Business......................................................        3
Item 2. Properties....................................................       14
Item 3. Legal Proceedings.............................................       14
Item 4. Submission of Matters to a Vote of Security Holders...........       14
PART II...............................................................       15
Item 5. Market For Registrant's Common Equity and Related
        Stockholder Matters...........................................       15
Item 6. Selected Financial Data.......................................       16
Item 7. Management's Discussion and Analysis of Financial Condition
        and Results of Operations.....................................       17
Item 8. Financial Statements and Supplementary Data...................       24
Item 9. Changes in and Disagreements with Accountants on Accounting
        and Financial Disclosure......................................       24
PART III..............................................................       24
Item 10. Directors and Executive Officers of the Registrant...........       24
Item 11. Executive Compensation.......................................       24
Item 12. Security Ownership of Certain Beneficial
         Owners and Management........................................       24
Item 13. Certain Relationships and Related Transactions...............       24
PART IV...............................................................       25
Item 14. Exhibits, Financial Statement Schedules, and
         Reports on Form 8-K..........................................       25
-----------

CIC(R)   and  its  logo,   Handwriter(R),   Jot(R),   InkTools(R),   Sign-it(R),
WordComplete(R)  and  INKshrINK(R)  are  registered  trademarks  of the Company.
HRS(TM),  InkSnap(TM),  PenX(TM),  QuickNotes(TM),   RecoEcho(TM),  Sign-On(TM),
Speller(TM)  and  iSign(TM)  are  trademarks  of the Company.  Applications  for
registration of various trademarks are pending in the United States,  Europe and
Asia.  The  Company  intends  to  register  its  trademarks  generally  in those
jurisdictions where significant  marketing of its products will be undertaken in
the foreseeable future.

Certain  statements  contained  in this  Annual  Report on Form 10-K,  including
without limitation,  statements containing the words "believes",  "anticipates",
"hopes",  "intends",  "expects",  and other words of similar import,  constitute
"forward looking" statements within the meaning of the Private Litigation Reform
Act of 1995. Such statements involve known and unknown risks,  uncertainties and
other  factors  which  may  cause  actual  events  to  differ   materially  from
expectations.   Such  factors   include  the   following:   (1)   technological,
engineering,  quality control or other  circumstances which could delay the sale
or  shipment  of  products;  (2)  economic,  business,  market  and  competitive
conditions in the software  industry and  technological  innovations which could
affect the Company's  business;  (3) the Company's  ability to protect its trade
secrets  or  other  proprietary  rights,  operate  without  infringing  upon the
proprietary   rights  of  others  or  prevent  others  from  infringing  on  the
proprietary  rights  of the  Company;  and (4)  general  economic  and  business
conditions and the availability of sufficient financing.

                                      -2-
<PAGE>

                                     PART 1
Item 1. Business

General

     Communication  Intelligence  Corporation  (the  "Company"  or "CIC") is the
global  leader in biometric  signature  verification  and a leading  supplier of
electronic  signature and natural input software  solutions focused on emerging,
fast growth,  large  potential  markets such as document  automation,  corporate
security, handheld computers,  smartphones,  and the Palm OS aftermarket. CIC is
headquartered   in  Redwood   Shores,   California  and  has  a  joint  venture,
Communication  Intelligence  Computer  Corporation,  Ltd.  ("CICC" or the "Joint
Venture"),  in Nanjing, China. Industry leaders who have chosen to license CIC's
technologies  include;  Charles Schwab,  Compaq,  EDS, Ericsson,  Fujitsu,  IBM,
Legend,  Microsoft,  Mitsubishi,  National  Semiconductor,   Prudential,  Siebel
Systems, and The Tennessee Valley Authority .

     The Company's core software  technologies include multilingual  handwriting
recognition systems (Jot(R) and the Handwriter(R)  Recognition System,  referred
to  as  HRS(TM)),   electronic  signature,   biometric  signature  verification,
cryptography, electronic ink capture tools (InkTools(TM),  Sign-it(R), iSign(TM)
and  Sign-on(TM)),  and  operating  system  extensions  that  enable  pen  input
(PenX(TM)).  Other consumer and original equipment manufacturer ("OEM") products
include electronic notetaking  (QuickNotes(TM),  and InkSnap(TM)) and predictive
text input  (WordComplete(R)).  CIC's products are designed to increase the ease
of use,  functionality  and  security of smart  handheld  devices with a primary
focus on smartphones, handheld computers ("PDAs") and portable web browsers.

     As a result of the economic slowdown in 2001, which was further exacerbated
by the tragic events of September  11th,  revenues for the fourth quarter ending
December 31, 2001  decreased 35% to $1.5 million as compared to $2.3 million for
the  corresponding  quarter of the prior year and revenue  decreased 19% for the
year ended December 31, 2001 to $5.9 million as compared to $7.3 million for the
prior year. Despite the external factors,  which negatively  impacted purchasing
decisions and  expenditures in the company's  market segments  throughout  2001,
fourth quarter 2001 revenues were up over third quarter 2001 revenues by 65%. We
believe this reflects the increasing  awareness and demand for CIC  technologies
in our target market segments and applications.

Enterprise Revenues

     Triggered by the signing of the E-Sign Bill in October 2000 and the passage
of  similar  legislation  making  electronic   signatures  legally  binding,  in
virtually  every  major  economy  in the  world,  the  transition  began  toward
automating  transactions in signature  dependent  industries.  CIC's handwritten
electronic  signature  solutions  and  electronic  forms  provide  the basis for
significant  expense reduction through document  automation by eliminating paper
documents and related labor, mailing and storage expense. The billions of signed
original  documents  created in today's global economy demand the utmost in user
identification   and  document   integrity.   The  inherent  risks,   logistical
difficulties   and  staggering   financial   costs   associated  with  creating,
processing,  storing  and  retrieving  paper  records are driving the demand for
legally binding and, secure electronic documents.


     The Company's Enterprise related revenue increased 21% over the prior year,
to $1.7 million from $1.4 million . This growth, we believe, reflects increasing
awareness  and  demand  for our  electronic  signature  technology  despite  the
economic  environment  that  negatively  impacted  last year's IT  expenditures.
Countless  paper  documents were lost or destroyed in the September 11th tragedy
and the many resulting business failures and disruptions could have been avoided
if  electronic  documents  had  been  utilized.   CIC's  biometrics  handwritten
signature technology provides the benefits of the paperless environment with the
social  acceptance of a  non-intrusive  handwritten  signature  (versus a finger
print,  iris/facial  scan,  or DNA) and a much higher level of security than the
traditional  "wet ink" signature.  We believe that combining our technology with
electronic  documents will reduce  dependency on mail and business  travel while
enabling business transactions at Internet speed.

                                      -3-
<PAGE>


Enterprises that chose to license our technology include the following:

    Licensee              Product(s) licensed    Application of Products
-------------------      ---------------------   ------------------------

     Accelio                   Inktools          E-Signature for mobile forms

     Al-Faris                  Multiple          Reseller and integrator in the
                                                 Middle East focused on
                                                 E-Signatures

     Allergan Sales            Sign-it           Clinical regulatory
                                                 applications

     Ameridial                 Inktools          E-Signature for internal use
                                                 documents

     Assurant Group            Sign-it           Sales force automation, new
                                                 account openings

     Audata, Limited           Multiple          Multiple applications focused
                                                 on paperless environment and
                                                 security

     Baptist Health            Inktools          E-Signature for patient records

     BF Goodrich, Aircraft     Sign-it           E-Signature for internal use
     Sensor Division                             documents

     Canada Customs            Sign-it           E-Signature for internal use
                                                 documents

     Charles Schwab            Sign-it           New account openings

     Decade Software           PenX & Inktools   Windows pen computer upgrades

     E-Com Asia Pacific Pty    Multiple          Regional reseller, multiple
     Ltd.                                        applications

     EDS                       InkTools          Information assurance for
                                                 network and application
                                                 security

     Federal Reserve Bank      Sign-On           Biometric mobile device access
                                                 security

     FMC Corp.                 Sign-it           E-Signature for internal use
                                                 documents

     First American Bank       Sign-it           E-Signature for various
                                                 financial and internal
                                                 documents

                                      -4-
<PAGE>

     Licensee             Product(s) licensed    Application of product
-------------------      --------------------    ----------------------

     IA Systems                Inktools          E-Signature for loan
                                                 organization

     ILI Technologies(P,Ltd.   Inktools & iSign  Various E-Signature
                                                 applications for the vertical
                                                 markets in Israel

     Integrate Online          InkTools          Mortgage closing

     Naval Surface Warfare     Inktools          E-Signature for material
     Center                                      receipts

     Novabase                  Sign-it           Systems integrator for various
                                                 vertical market applications

     Old Republic National     Sign-it           Title processing applications
     Title

     Orange County, CA         Sign-it           Automate building permit
                                                 process

     PHT Corporation           Sign-it           Clinical trial documents

     Physician WebLink         Sign-it           Automate patent
                                                 enrollment/records/billing

     Proware                   Inktools          E-Signature for judicial orders

     PSC Communications        Multiple          Reseller and OEM Partner in
                                                 the UK focused on E-Signature

     PureEdge                  Sign-it           E-Signature for financial
                                                 documents

     RecordsCenter.com         InkTools          Legal contracts and other
                                                 significant documents

     Siebel                    Multiple          Sample delivery of regulated
                                                 drugs

     Siemens Medical Solutions Multiple          E-Signature for healthcare

     Symbol Technologies       Multiple          Reseller for all major products

     Tennessee Valley          Multiple          E-Signature for approval of
     Authority                                   internal documents

     Wisconsin Electric Power  Sign-On           Biometric mobile device access
     Company                                     security


                                      -5-
<PAGE>

     A 2001 IDC study projects the biometrics handwritten signature verification
market, for network  authentication alone, will grow from $14 million in 2002 to
approximately  $32 million by 2005. A 2001 QDI  Strategies,  Inc market analysis
estimated the signature verification software market, in document automation and
mobile device security applications,  will grow from $15 million in 2002 to over
$82 million by 2005.  The total  market  potential  reflected in the IDC and QDI
studies, for electronic signature software is in excess of $110 million by 2005.
IDC  further  identified  CIC as  the  undisputed  global  leader  in  biometric
handwritten signature verification with 82% market share.

     We are  optimistic  that CIC's  installed base and pilot programs which are
nearing  rollout,  some of which are included above,  will provide the basis for
increasing revenue growth in both the near term and beyond.

OEM Revenues

     OEM revenue for 2001 declined 37% over the prior year, to $1.2 million from
$1.9  million  reflecting  significant  cutbacks in planned  shipments  of smart
handheld  devices  including  handheld  computers  (PDAs) and  smartphones.  For
instance,  handheld computer  shipments in 2001 were approximately 10% below the
prior year and mobile phone  shipments  have been virtually flat in 2001 after a
compound annual growth rate of 60% from 1996 through 2000.

     In 1999, CIC won a breakthrough  order/license  agreement from Ericsson for
both natural input and electronic  signature  solutions for its R380  smartphone
which began shipment,  on a worldwide basis, in the fourth quarter of 2000. R380
shipments,  however,  have been significantly behind expectations because of the
economic environment as well as Ericsson's own market related difficulties which
ultimately  led to a mobile  communications  merger  last  year with  Sony.  The
combined   strength  of  Ericsson's   mobile   technology  and  Sony's  consumer
electronics  and retail  distribution  know-how has resulted in rave reviews for
both their potential  competitiveness and for their new multi-media  smartphone,
the P800,  (Smartphones  combine the function of voice PDA and wireless internet
access).  The P800  debuted  at CeBit in March  and we are  optimistic  that the
planned  introduction of this new smartphone,  together with other Sony-Ericsson
related  activity,  affords CIC the opportunity to participate in  Sony-Ericsson
smartphone shipments consistent with our initial expectations.

     Despite the fact that industry forecasts for smartphones have been reduced,
by as much as 75% from previous estimates, current IDC projections still provide
the Company  with solid  revenue  growth  potential  of 5 million  units in 2002
growing to 23 million units by 2004. In addition to  smartphones,  CIC's current
licensees include PDA, webpad, and digitizer tablet manufacturers.  According to
IDC,  sales of these smart  handheld  devices are  projected  to grow to over 47
million units annually by 2004.

     Market  activity  since  the  events of  September  11th  reflects  growing
awareness  and demand for both CIC's  handwriting  recognition  products and for
biometric  handwritten signature  verification,  utilized as a security utility,
across the entire  smart  handheld  device  market.  The Company  believes  that
significant  royalty  potential  exists for 2002 and beyond based on its present
and potential OEM agreements.

Key OEM Licensees include:

 Licensee            Product(s) licensed            Application of product
---------------    ------------------------   ---------------------------------

  AirSpeak                 Jot                  Handheld PC Pro

  Sony Ericsson            Jot, QuickNotes,     Smart cellular phone
                           Sign-On &
                           WordComplete

  Fujitsu                  HRS, PenX, Sign-On   Windows and Windows CE pen
                           Plus &InkTools       computers

  GSC Mobile Solutions     Inktools             Windows pen computers

                                      -6-
<PAGE>

 Licensee             Product(s) licensed           Application of product
---------------     -----------------------    --------------------------------

  HP                        Jot                  Linux based PDA

  IA Systems                Jot                  Wireless Internet access device

  IBM                       Sign-it              Windows pen notebook

  Inteliworxx               HRS & PenX           Windows pen computers

  Interlink                 Sign-it              E-Signature retail bundle

  Intermec/Norand           HRS & PenX           Windows pen computers

  Mathsoft                  Math Recognizer      Handwriting recognition for
                                                 mathematical notation

  National Semiconductor    Jot                  Wireless Internet access device

  Pacific Star              PenX                 Windows pen computers

  Telos Corp.               PenX                 Windows pen computers

  Topaz                     InkTools             E-Signature bundle

  Vtech                     Jot                  Electronic organizer

  Wacom                     Chinese Handwriter   Digitizer tablet and
                            & Sign-it            E-Signature

  Walkabout                 HRS & PenX           Windows pen computers

  Xplore                    HRS & PenX           Ruggedized mobile computers

  Xybernaut                 HRS, PenX & Jot      Wearable computers

Online Revenues

     Revenue from the Company's software sold through its website, (www.cic.com)
was $.9 million in 2001 as compared to $1.2  million in 2000,  a decline of 25%.
Online sales are generated primarily through direct mail sent to Palm PDA owners
whose  names and  addresses  are  acquired  from  Palm.  Most of CIC's  software
products are  available  for the Palm  operating  system  ("OS") which  includes
Handspring,  IBM, Symbol, Kyocera, Samsung and Sony devices. Exposure is limited
to a capture  rate of about 25% of new Palm  owners.  Palm OS  shipments in 2001
were 10% less than the  prior  year as a result of the  economic  slowdown  that
affected the entire smart  handheld  device market.  Online  revenues for CIC in
2001  reflect  both the lower Palm OS  shipments  as well as a  decrease  in the
direct mail close rate  attributed to Palm  shipments of lower cost devices such
as the m100 and m105. These devices,  priced at $99 and $149  respectively,  are
targeted  at  children  and  college   students  who  are  not  as  inclined  to
purchase/add software upgrades as professional consumers.

     In the third quarter of 2001,  CIC entered into an agreement  with Elibrium
that  positions the  company's  Palm OS based  offerings  directly at the retail
point of sale next to Palm OS devices.  This provides a significant  increase in
exposure through up to 10,000 retail stores including Comp USA, Staples,  Office
Max and other  leading  retailers.  This retail  distribution  will expose CIC's
software upgrade products to a much larger base of potential buyers than through
direct mail only. 70% of new buyers of Palm OS based handheld computers purchase
at retail  and CIC  software  products  will also gain  exposure  to  additional
potential buyers who already own Palm devices.

                                      -7-
<PAGE>

     Palm OS based  handheld  computers,  despite  the  market  decline in 2001,
remain  the  global  leader  with  almost 63% of the  handheld  computer  market
worldwide. The 2001 year end installed base is estimated at 13 million in the US
alone and is  estimated  to grow to over 47 million  domestically  by 2005.  The
Company believes that positioning its Palm aftermarket  products directly at the
point of sale,  together with CIC's direct mail programs,  will optimize  Online
revenue  growth in the near term and generate  meaningful  sales  growth  longer
term.

China

     Revenue from CICC, the Company's 90% owned Chinese Joint Venture, decreased
10% for the year ended  December 31, 2001,  from $1,911 in 2000 to $1.7 million.
CICC represents a major opportunity for the Company.  China is the world's third
largest  economy  and its recent  accession  into the World  Trade  Organization
("WTO") is fueling  economic  growth and  individual  buying  power in this vast
nation of 1.3 billion  people.  The Joint  Venture was  established  almost nine
years  ago and the  Company  believes  that the 10%  ownership  position  by the
Jiangsu   Hongtu   Electronics   Group  provides   considerable   stability  and
credibility.  The company believes that CICC's electronic  signature and Chinese
handwriting  recognition software  applications,  including automating signature
dependent  document  processes  and  corporate  security,  will be in increasing
demand as China  prepares  to  compete on a world  wide  basis  through  its WTO
membership.  The China  Ministry  of  Railways,  Hu Nan  Mobile  Communications,
Agricultural  Bank of China,  and the Nanjing Civic Bureau are among the Chinese
companies  and  government  agencies  who chose and  implemented  CICC  software
solutions in 2001. This adds to an installed base including  Panda,  Neu-Alpine,
Hongtu High-Tech, Ministry of Agriculture, and the Ministry of Aviation.

     Last year,  CICC emerged as the leading  supplier in Jiangsu  Province of a
fast growing mobile  industry  application for regulated goods with an estimated
70% market share.  This turn-key offering provides hardware and software systems
for the  receipt and  delivery  of taxed,  measured  and  monitored  goods using
handheld  devices  from  companies  including  Symbol  Technologies,   Palm  and
Handspring.  CICC's  offering  includes the  integration of enterprise  software
solutions for the server side or back-end management of these mobile systems and
captured data.  This offering  further affords CICC the opportunity to integrate
electronic  signature and Chinese  handwriting  recognition  technology into its
turn-key solutions.

     The Company  believes that the emerging  markets for  electronic  signature
based applications and handheld receipt/input based systems,  acceptance of CICC
products by leading Chinese enterprises and government agencies,  the legitimacy
and  credibility  afforded CICC by the Joint  Venture and the  explosive  growth
potential  of the China  market,  now  driven by  accession  to the World  Trade
Organization, provide CICC significant growth potential in 2002 and beyond.

Segments

     In June 1997, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards  No.  131,  "Disclosures  About  Segments of An
Enterprise and Related  Information"  ("SFAS 131"). SFAS 131 revised information
required  regarding the  reporting of operating  segments and was required to be
adopted in periods  beginning  after  December  15,  1997.  It also  establishes
standards for related disclosures about products and services,  geographic areas
and major  customers.  The Company  adopted SFAS 131 for the year ended December
31, 1998, and the Company's  information has been stratified into two segments -
handwriting   recognition   software  and  systems   integration.   For  further
information see Note 9 to the Company's Consolidated Financial Statements.

     The Company identifies reportable segments by classifying revenues into two
categories   handwriting   recognition  and  system   integration.   Handwriting
recognition  software  is  an  aggregate  of  three  revenue  categories,   OEM,
Enterprise and Online sales. All handwriting  recognition  software is developed
around the Company's core technology. System integration represents the sale and
installation  of third party  computer  equipment  and systems  that utilize the
Company's products.

                                      -8-
<PAGE>

Core Technologies

     The Company offers a wide range of  multi-platform  software  products that
enable or enhance  pen-based  computing.  The Company's  core  technologies  are
classified  into  two  broad  categories:   "natural  input   technologies"  and
"transaction and communication enabling technologies."

     Natural Input  Technologies.  CIC's natural input technologies are designed
to allow  users to  interact  with a  computer  or  handheld  device by using an
electronic pen or "stylus" as the primary input device or in conjunction  with a
keyboard.   CIC's  natural  input  offerings  include  multilingual  handwriting
recognition systems,  software keyboards,  predictive text entry, and electronic
ink  capture  technologies.  Many  small  handheld  devices  such as  electronic
organizers,  pagers and smart cellular  phones do not have a keyboard.  For such
devices,  handwriting  recognition and software  keyboards offer the most viable
solutions for performing  text entry and editing.  CIC's  predictive  text entry
technology  simplifies  data entry even further by reducing the number of actual
letters  required  to  be  entered.   The  Company's  ink  capture  technologies
facilitate  the  capture of  electronic  ink for  notetaking,  drawings or short
handwritten messages.

     Transaction  and  Communication   Enabling   Technologies.   The  Company's
transaction and  communication  enabling  technologies are designed to provide a
cost-effective means for securing electronic transactions, providing network and
device access control,  and enabling  workflow  automation of traditional  paper
form  processing.  CIC believes  that these  technologies  offer more  efficient
methods for conducting  electronic  transactions while providing more functional
user authentication and heightened data security.  The Company's transaction and
communication  enabling technologies have been fundamental in its development of
software for  electronic  signatures,  biometric  signature  verification,  data
security, and data compression.

Products

Key CIC products include the following:

 Handwriter and Jot              Handwriting recognition software

 InkTools                        A suite of application development tools for
                                 electronicsignatures, biometric signature
                                 verification and cryptography

 iSign                           Web based development tools for electronic
                                 signature and biometric signature verification

 PenX                            Operating systems extensions for the Windows
                                 recognition environment that enables pen based
                                 functionality and handwriting

 QuickNotes and InkSnap          Electronic handwritten notetaking software

 Sign-it and Sign-it Server      Electronic signatures for the enterprise market

 Sign-On                         Biometric signature verification software for
                                 device access

 WordComplete?                   Predictive text entry software


Products and upgrades that were introduced and first shipped in 2001 include the
following:

Sign-it for Word 3.2
Sign-it for Acrobat v 3.2
Sign-it Server 2.0
Sign-it EX v 1.14
Sign-On for Windows 1.0

                                      -9-
<PAGE>

Sign-On for Pocket PC 2.01
WordComplete for Palm v 2.01
WordComplete v 2.0 UK English Dictionary
WordComplete v 2.0 Spanish Dictionary
WordComplete v 2.0 French Dictionary
WordComplete v 2.0 Italian Dictionary
WordComplete v 2.0 German Dictionary
iSign for Windows v 2.0
iSign for Java v 1.1
PenX v 2.02
Jot for Windows CE v 2.2
Handwriter for CE v2.2
InkTools for CE v 1.6
InkTools for Windows v 2.52

     Handwriting   recognition  software  analyzes  the  individual  strokes  of
characters  written with a pen/stylus  and converts these stokes into an "ASCII"
text  character.  This  software is  especially  useful for portable  electronic
devices  that  are too  small  to  employ  a  keyboard,  and for  the  input  of
ideographic  script  characters  such as  those  used  in  written  Chinese  and
Japanese. The Company currently has two recognition system offerings, Handwriter
and Jot.

     CIC's  Handwriter   Recognition  System  ("HRS(TM)")  is  an  award-winning
software  solution for recognizing  handwritten  input on Windows and Windows CE
based pen  computers  and desktop PCs.  HRS  accurately  recognizes  handwritten
characters  with  no  recognizer  training  required,  so  the  user  can  write
naturally.  HRS is a full-context  recognizer  that offers some unique  features
such as automatic  spacing  between  words and automatic  capitalization  of the
first  letter  of new  sentences.  HRS is  also  an  integral  component  of the
Companies  PenX  software  that is  currently  shipping  on many of the  leading
Windows based pen computers.  Key vertical market  licensees of HRS include such
companies as; Fujitsu, Intermec, Xplore, Mitsubishi and Walkabout.

     Jot is a print-based  recognizer  that is  specifically  designed for small
form factor  devices.  Unlike many  recognizers  that  compete in the market for
handheld data input solutions,  Jot offers a patented user interface that allows
for the input of natural upper and lowercase letters,  standard  punctuation and
European  languages  without requiring the user to memorize unique characters or
symbols. This recognizer offers rapid and accurate recognition without requiring
the consumer to spend time  training the system.  Jot has been  licensed to such
key OEMs as: Microsoft, Ericsson, Symbian, National Semiconductor and Vtech. Jot
has been  ported  to many  operating  systems  including  the Palm OS,  Windows,
Windows CE, VT-OS,  EPOC, QNX, Linux and OS/9 and is currently under development
for  others.  The  standard  version of Jot,  which is  available  through  OEM,
enterprise  and Online  product  offerings,  recognizes  and  supports  input of
Roman-based Western European languages.

     InkTools is an electronic  signature and biometric  signature  verification
software  developers  kit that  captures and analyzes the image,  speed,  stroke
sequence  and  acceleration  of a  person's  handwritten  electronic  signature.
InkTools  provides an extremely  effective and  inexpensive  biometric  security
check for real-time authentication.  It also stores certain forensic elements of
a  signature  for  use  in  post  signing  non-repudiation  and  authentication.
Commercial  applications for this type of software  include  document  approval,
verification of the identity of users  participating in electronic  transactions
and,  securing  log-in access to computer  systems or protected  networks.  This
software  toolkit is used internally by CIC as the underlying  technology in its
Sign-On and Sign-it  products and has been  licensed to several key  development
partners including EDS, Bionetrix, Siebel and Topaz Systems.

     Sign-On  is a  product  offering  that  utilizes  the  Company's  biometric
signature  verification  technology  to  provide  access  security  on  portable
devices.  This provides the additional level of security needed for devices that
are increasingly  being used in business and generally  contain  sensitive data.
Currently  available  for the Palm 3.x or later  and  Windows  CE 3.x  operating
systems,  the product is also being  ported to EPOC and other  platforms to meet
the specifications of new licensees and customers.

                                      -10-
<PAGE>

     Sign-it is a family of electronic  signature products for enabling the real
time capture,  binding and verification of electronic signatures within standard
consumer  applications.  These  products  combine  the  strengths  of  biometric
signatures and cryptography to process, transact and create electronic documents
with  the  same  legal  standing  as  a  traditional  wet  signature  on  paper.
Organizations  wishing to process  electronic forms requiring  varying levels of
security  can reduce  the need for paper  forms by adding  electronic  signature
technologies to their workflow solution.  Currently, Sign-it is available for MS
Word  and  Adobe(R)   Acrobat(R)   while  support  for  additional   application
environments are in development.

     iSign  provides  functionality  similar to  InkTools  but was  specifically
designed for web based  architectures.  The current  product  supports  either a
Windows implementation with Internet Information Server and Internet Explorer or
Java. The Java  implementation  was designed to meet the needs of the higher-end
server  products that support Java 2 and a broad base of client  systems,  which
can range from Windows devices to PDAs.

Marketing

     The Company's  products are marketed  through three sales  approaches:  OEM
Sales,  enterprise  and  online/retail  sales.  OEM sales  efforts  are aimed at
license  revenues  derived from primarily smart handheld  device  manufacturers.
Enterprise sales efforts are directed at both software  providers and end-users.
Online sales represent  revenues  generated from the Company's software sold via
its website, www.cic.com.

     OEM  Licensed  Products.  CIC  currently  licenses  software  products  for
Windows(R)3.x,  Windows(R)'95,  Windows'98,  WindowsNT,  WindowsCE,  EPOC,  QNX,
VT-OS,  Palm and Linux.  CIC also ports its products to other  platforms to meet
the  specifications of licensees.  The Company's PenX,  Sign-it , and Handwriter
Recognition  System are licensed for portable PCs utilizing  the  Windows(R)'95,
Windows(R)'98,  Windows(R)NT,  and WindowsCE  operating systems and is primarily
used for field force automation and in pen-input PC peripherals for desktop use.
Jot,  QuickNotes,  Sign-On,  WordComplete  and the  CIC  software  keyboard  are
licensed  primarily for the new,  smaller classes of Handheld PCs and Pocket PCs
such as those that  utilize the  Windows(R)CE  operating  systems  and  handheld
communicators  such  as  smartphones  and  PDAs  that  use the  Palm or  Symbian
operating system.

     Enterprise  Solution Products.  CIC offers several products targeted at the
broad  enterprise  market.  This market could benefit from  workflow  automation
solutions using electronic  signatures or biometric  authentication  such as new
account openings,  regulated document  submissions and device/network  security.
For these  markets,  CIC offers  several  products  including  InkTools,  a high
performance  software  developer's kit for implementing systems using electronic
ink and electronic  signatures which is available for almost all major operating
systems,  iSign  which  provides  the  same  functionality  as  InkTools  but is
specifically  designed for  distributed  application  architectures  and Sign-it
which is designed to provide this functionality within the framework of the most
common word processing applications and electronic form publishing environments.

     Online Product Offerings.  The Company's Online Sales department is charged
with the sale of the Company's  shrink-wrapped  software applications and tools.
This  currently  includes most of CIC's  products and everyone from consumers to
software  developers and  corporations  are  customers.  These products are sold
through  retail  outlets and over the Internet on CIC's own website and by other
Internet-based  electronic  resellers.  Consumer  versions of these products are
being sold for users of the Palm connected organizers and Windows(R) CE devices.
Much of the growth in Online sales since 1998 was attributable to sales of these
products to users of Palm OS devices.

History

     The Company was  initially  incorporated  in Delaware in October  1986 as a
wholly owned subsidiary of a predecessor corporation with the same name. In each
year since its  inception,  the Company has incurred  losses.  The Company has a
90%-owned Joint Venture,  Communication Intelligence Computer Corporation, Ltd.,
with the Jiangsu Hongtu  Electronics Group, LTD. The Joint Venture was formed in
September 1993.

     In October,  2000,  a  wholly-owned  subsidiary  of the  Company,  acquired
certain assets of PenOp Limited  ("PenOp") and its subsidiary PenOp Inc. ("PenOp
USA" and together  with PenOp,  the  "Sellers"),  pursuant to an asset  purchase
agreement,  dated as of  September  29,  2000,  by and among the Company and the

                                      -11-
<PAGE>

Sellers (the "Acquisition"),  in exchange for 4.7 million shares of common stock
of the Company (the "Transaction  Shares").  Out of the 4.7 million  Transaction
Shares issued to the Sellers in connection with the  Acquisition,  approximately
940,000  shares  are being  held in escrow  to cover  potential  indemnification
claims.

Copyrights, Patents and Trademarks

     The Company  relies on a combination  of patents,  copyrights,  trademarks,
trade secrecy and contractual  provisions to protect its software  offerings and
technologies. There can be no assurance, however, that these protections will be
adequate  or that  the  Company's  competitors  will not  independently  develop
technologies  that are  substantially  equivalent  or superior to the  Company's
technologies.  In addition, the laws of certain countries in which the Company's
products are licensed may not protect the  Company's  products and  intellectual
property rights to the same extent as the laws of the United States.  Because of
the rapid evolution of technology and uncertainties in intellectual property law
in the United  States and  internationally,  there can be no assurance  that the
Company's  current or future  products  or  technologies  will not be subject to
infringement by others. The Company's  licensees and distributors have access to
proprietary information of the Company. In addition a substantial portion of the
Company's  technology and know-how are maintained as trade secrets,  and are not
protected by patent,  trademark or copyright  laws.  The Company has a policy of
requiring its  employees  and  contractors  to respect  proprietary  information
through  written  agreements.  The  Company  also  has  a  policy  of  requiring
prospective business partners to enter into non-disclosure agreements before any
of the Company's  proprietary  information is revealed to them.  There can be no
assurance  that the measures  taken by the Company to protect its  technologies,
products  and other  proprietary  rights  will  adequately  protect  it  against
improper use.

     Certain  technological  processes  originally  implemented in the Company's
software  offerings were developed and patented by Stanford  Research  Institute
("SRI") and SRI assigned  those  patents,  which  subsequently  expired,  to the
Company.  The  Company  has  made  significant   improvements  to  the  original
technologies and additional patents relating to such technological  improvements
have been  applied for or issued.  Therefore,  the Company does not believe that
the  expiration of the SRI patents has had or will have a significant  effect on
its  operations.  Other major elements of the Company's  software  offerings and
technologies  were developed by the Company and have been patented.  As a result
of the PenOp  transaction,  the Company acquired all the  intellectual  property
rights  of that  company  adding  that full  range of  patents,  copyrights  and
trademarks to its portfolio.  Certain of the Company's  existing  patents expire
between  the years 2002 and 2017.  The Company is unable to predict at this time
the impact to its business, if any, from such expiration.

     CIC has an extensive  list of registered  and  unregistered  trademarks and
applications  in the United States and other  countries.  The Company intends to
register its  trademarks  generally  in those  jurisdictions  where  significant
marketing of its products will be undertaken in the foreseeable future.

     The Company may be required or elect to take various  forms of legal action
from time to time to protect its proprietary  rights.  Any litigation  regarding
claims  against the Company or claims made by the Company  against  others could
result  in  significant  expense  to the  Company,  divert  the  efforts  of its
technical and  management  personnel and have a material  adverse  effect on the
Company,  whether or not such litigation is ultimately  resolved in favor of the
Company.  In the event of an adverse result in any such litigation,  the Company
may be  required  to expend  significant  resources  to  develop  non-infringing
technology or obtain licenses from third parties. There can be no assurance that
the Company would be successful  in such  development  or that any such licenses
would be available on commercially reasonable terms, if at all.

Seasonality of Business

     Historically,  the Company has not experienced  seasonal  trends  affecting
sales of its products or the development or licensing of its technologies.

Material Customers

     Historically,  the Company's handwriting  recognition segment revenues have
been derived from a limited number of customers.  One customer accounted for 16%

                                      -12-
<PAGE>

and one customer  accounted for 13% of revenues in 2001. One customer  accounted
for 16% and two customers  accounted  for 11% of revenues in 2000.  One customer
accounted for 27% of the Company's  handwriting  recognition segment revenues in
1999. The loss of any significant customer or other source of revenue could have
a material adverse effect on the Company.

Backlog

     At December 31, 2001, backlog approximated  $88,000,  representing advanced
payments  on  service  maintenance  agreements  and  non  recurring  engineering
projects  which are expected to be recognized  over the next twelve  months.  At
December 31, 2000, backlog approximated  $61,000,  representing advanced royalty
and service maintenance  agreements.  At December 31, 1999, backlog approximated
$35,000.

Competition

     The markets  for CIC's  offerings  are  competitive,  and have  attracted a
number of competitors within certain product markets.  The Company intends to be
responsive to emerging  market  demands as well as  competitive  threats.  While
competitors  may pose a threat to the  Company's  efforts to gain  market  share
within certain markets,  the Company believes these  competitors also help bring
attention to and build awareness for pen-input solutions. Certain competitors of
the Company have  substantially  greater financial and other resources than that
of the Company.  The Company  faces  competition  at different  levels.  Certain
competitors  have  developed or are  developing  software  offerings,  which may
compete directly with the Company's offerings. Most of the direct competitors of
CIC have  focused  only on one element of such  offerings,  such as  handwriting
recognition  technology,  signature  capture/verification or pen-based operating
environments or other pen-based applications. While the Company believes that it
has a competitive advantage in some cases due to its range of product offerings,
there can be no  assurance  that  competitors  will not  succeed  in  developing
products  or  technologies  that  are  more  effective,  easier  to use or  less
expensive than the Company's  products or  technologies or that would render the
Company's products or technologies  obsolete or non-competitive.  Competitors of
the Company  include  certain of the Company's  current and potential  strategic
partners and customers who are developing or acquiring  alternative products and
technologies  to those  offered by the Company.  There can be no assurance  that
companies with which the Company has established or will establish distribution,
license, product development or other strategic relationships will not choose to
market  competitive  technologies or products  developed  internally or acquired
from third parties.

Joint Venture in the People's Republic of China

     The Company currently owns 90% of the Joint Venture with the Jiangsu Hongtu
Electronics Group LTD, formerly the Information Industries Bureau of the Jiangsu
Province,  a provincial agency of the People's Republic of China (the "Agency").
As of December  31,  2001,  the Company had  contributed  an  aggregate  of $1.8
million in cash to the Joint Venture and provided it with non-exclusive licenses
to technologies and certain  distribution rights, and the Agency had contributed
certain land use rights.  In 1998, the  registered  capital of the Joint Venture
was reduced, and as a result,  pursuant to the terms and provisions of the Joint
Venture agreement, neither party is required to make further contributions.  For
further  information,  see  "Management's  Discussion  and Analysis of Financial
Condition and Results of  Operations--Joint  Venture in the People's Republic of
China".

Employees

     As of March 25,  2002,  the  Company  and the  Joint  Venture  employed  an
aggregate of 60 full-time employees, 23 of which are in the United States and 37
of which are in China.  From time to time,  the Company also engages  additional
personnel on an as needed basis. The Company believes it has good relations with
its  employees.  None of the  Company's  employees  is a party  to a  collective
bargaining agreement.

Geographic Areas

     For the years ended December 31, 2001, 2000, and 1999, the Company's export
sales as a percentage of total  revenues were  approximately  17%, 24%, and 36%,
respectively.  The decrease in export sales in 2001,  is due to the reduction in

                                      -13-
<PAGE>

licensing revenues from Ericsson compared to the prior year period. The decrease
in export sales in 2000,  is due to the  reduction in  licensing  revenues  from
Ericsson  compared to the prior year  period.  The  increase in export  sales in
1999, is due to the recognition of licensing revenues from Ericsson. The Company
maintains certain agreements with Japanese  customers;  however the revenues are
derived from the Company's U.S.  operations.  Due to the volume of the Company's
sales on its website,  and the selling price of the products offered,  it is not
economically feasible to track product sales by individual country.

     The  Company  is  subject to  various  risks in  connection  with the Joint
Venture  in the  People's  Republic  of  China,  including  the  risks  commonly
associated   with  doing  business   abroad.   For  further   information,   see
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations"  and  Notes  2  and  9  to  the  Company's   Consolidated  Financial
Statements.

Forward Looking Statements

     Certain statements  contained in this Annual Report on Form 10-K, including
without limitation,  statements containing the words "believes",  "anticipates",
"hopes",  "intends",  "expects",  and other words of similar import,  constitute
"forward looking" statements within the meaning of the Private Litigation Reform
Act of 1995. Such statements involve known and unknown risks,  uncertainties and
other  factors  which  may  cause  actual  events  to  differ   materially  from
expectations.   Such  factors   include  the   following:   (1)   technological,
engineering,  quality control or other  circumstances which could delay the sale
or  shipment  of  products;  (2)  economic,  business,  market  and  competitive
conditions in the software  industry and  technological  innovations which could
affect the Company's  business;  (3) the Company's  ability to protect its trade
secrets  or  other  proprietary  rights,  operate  without  infringing  upon the
proprietary   rights  of  others  or  prevent  others  from  infringing  on  the
proprietary  rights  of the  Company;  and (4)  general  economic  and  business
conditions and the availability of sufficient financing.

Item 2. Properties

     The Company  currently  leases its  principal  facilities  (the  "Principal
Offices"),  consisting of  approximately  9,634 square feet, in Redwood  Shores,
California,  pursuant to a sub-lease  that  expires in 2006.  The Joint  Venture
leases  approximately  1,500  square feet in Nanjing,  China.  The Company  also
believes  that  its  current  facilities  will be  suitable  for it to  continue
operations in the foreseeable future.

Item 3. Legal Proceedings

     As of March 25, 2002, the Company was not a party to any legal  proceeding,
which,  if adversely  determined,  would have a material  adverse  effect on its
business.

Item 4. Submission of Matters to a Vote of Security Holders

     None

                                      -14-
<PAGE>
                                     PART II

Item 5. Market For Registrant's Common Equity and Related Stockholder Matters

     The  Company's  Common  Stock is  currently  listed on the Nasdaq  SmallCap
Market under the trading  symbol CICI.  The following  table sets forth the high
and low sale prices of the Common Stock for the periods noted.

                                                             Sale Price
                                                              Per Share
     Year    Period                                          High    Low

     2000    First Quarter...............................   $12.03  $ 5.31
             Second Quarter..............................   $ 5.22  $ 1.84
             Third Quarter...............................   $ 4.25  $ 2.25
             Fourth Quarter..............................   $ 3.06  $ 1.00
     2001    First Quarter...............................   $ 2.28  $ 0.97
             Second Quarter..............................   $ 1.63  $ 0.76
             Third Quarter...............................   $ 1.13  $ 0.64
             Fourth Quarter..............................   $ 0.91  $ 0.60
     2002    First Quarter (through March 25, 2001)......   $ 1.18  $ 0.56

     As of March 25,  2002,  the closing  sale price of the Common  Stock on the
Nasdaq  SmallCap  Market  was $1.08 per share and there were  approximately  660
registered holders of the Common Stock.

     To date,  the Company has not paid any  dividends  on its Common  Stock and
does not anticipate paying dividends in the foreseeable  future. The declaration
and payment of dividends on the Common Stock is at the  discretion  of the Board
of Directors  and will depend on, among other things,  the  Company's  operating
results, financial condition, capital requirements,  contractual restrictions or
such other factors as the Board of Directors may deem relevant.

     During the three months ended December 31, 2001, the Company  granted stock
options to employees and directors for services rendered as follows:

              Grant       Number of   Option       Vesting         Expiration
  Grantees    Date        Options     Price        Period          Date
  ------------------------------------------------------------------------------

 1 employee   10/01/2001   25,000     $0.69    3 year quarterly     10/01/2012

 1 Consultant 12/06/2001   29,421     $0.68     immediately         12/06/2012

 1 employee   12/07/2001   95,000     $0.66     25% immediately,    12/07/2012
                                                balance 3 year
                                                quarterly


                                      -15-
<PAGE>
Item 6. Selected Financial Data

     The selected consolidated financial data presented below as of December 31,
2001,  2000,  1999,  1998,  and 1997 and for each of the years in the  five-year
period  ended  December  31,  2001 are  derived  from the  audited  consolidated
financial statements of the Company. The consolidated financial statements as of
December 31, 2001 and 2000, and for each of the years in the  three-year  period
ended  December 31, 2001, are included in Item 8 of this Form 10-K. The selected
consolidated  financial  data should be read in  conjunction  with the Company's
audited  financial  statements  and the notes thereto and other portions of this
Form 10-K  including  "Business"  and  "Management's  Discussion and Analysis of
Financial Condition and Results of Operations."

                                         Year Ended December 31,
                               -------------------------------------------------
                                2001     2000     1999     1998      1997
                               -------------------------------------------------
                                   (In thousands, except per share amounts)
Statement of Operations Data:
Revenues.....................  $5,947   $7,312   $6,518   $4,581    $5,516
Research and development
expenses(1).................    1,808    1,603    1,363    1,989     2,360
Sales and marketing expenses.   2,054    2,239    1,877    2,015     6,257
General and administrative
expenses....................    2,791    2,181    1,683    1,889     2,663
Loss from operations........   (2,946)  (1,607)  (1,722)  (3,285)  (11,627)
Net loss available to common
stockholders(2).....           (3,215)  (1,799)  (1,740)  (3,592)  (16,940)
Basic and diluted loss per
common share................    (0.04)  ( 0.02)  ( 0.02)  ( 0.06) (   0.37)

                                            As of December 31,
                              --------------------------------------------------
                                2001     2000      1999     1998     1997
                              --------------------------------------------------
                                                            (In thousands)
Balance Sheet Data:
Cash, cash equivalents and
restricted cash...........     $2,588   $2,349    $2,374   $1,045   $5,485
Working capital(3)...........   3,017    3,109     3,054      346    2,721
Total assets.................  10,072   11,302     4,963    3,354    7,491
Deferred revenue.............      88       61        35      651      440
Long-term obligations........   3,000    1,427     1,338        -        8
Stockholders' equity (4).....   6,060    8,307     2,349    1,332    3,989
-----------

     (1)  Excludes  software  development  costs  capitalized in accordance with
          Statement of Financial Accounting Standards No. 86 of $20, $20, $9 and
          $17,  for the years ended  December  31, 2001,  2000,  1999,  and 1998
          respectively.  No software  development  costs were capitalized in the
          year ended December 31, 1997.

     (2)  The Company's 1997 net loss applicable to common stockholders includes
          a one-time,  non-cash  charge of $4.9 million  related to the embedded
          yield on the  Company's  Series A Preferred  Stock  issued in December
          1996 due to the discounted conversion provisions of such stock and the
          cumulative  dividends  of $1.25  per  share,  per  annum  on  Series A
          Preferred  Stock.  Includes  dividends on Series A Preferred Stock and
          Series B Preferred Stock of $435 and $564 for the years ended December
          31, 1998 and 1997, respectively.

     (3)  Current  liabilities used to calculate working capital at December 31,
          2001, 2000, 1999, 1998, and 1997 include deferred revenue of $88, $61,
          $35, $651, and $440, respectively.

     (4)  The  Company  has never paid  dividends  to the  holders of its common
          stock.

                                      -16-
<PAGE>

Item 7. Management's  Discussion and Analysis of Financial Condition and Results
        of Operations

Overview

     History.  The Company  was  initially  incorporated  in Delaware in October
1986. In each year since its inception, the Company has incurred losses. For the
five-year  period  ended  December  31,  2001,   operating   losses   aggregated
approximately  $21 million and at December 31, 2001,  the Company's  accumulated
deficit was approximately $76 million.

     Revenue  Recognition.  In October 1997, the American Institute of Certified
Public  Accountants  (the  "AICPA")  issued  Statement  of  Position  No.  97-2,
"Software Revenue  Recognition" ("SOP 97-2"),  which the Company has adopted for
transactions  entered into during the fiscal year beginning January 1, 1998. SOP
97-2 provides  guidance for  recognizing  revenue on software  transactions  and
supersedes  Statement of Position No. 91-1, "Software Revenue  Recognition".  In
March 1998,  the AICPA issued  Statement of Position No. 98-4,  "Deferral of the
Effective Date of a Provision of SOP 97-2,  Software Revenue  Recognition" ("SOP
98-4").  SOP 98-4 defers,  for one year, the application of certain  passages in
SOP 97-2  which  limit what is  considered  vendor-specific  objective  evidence
("VSOE")   necessary   to   recognize   revenue   for   software   licenses   in
multiple-element arrangements when undelivered elements exist. In December 1998,
the AICPA issued  Statement of Position No. 98-9 ("SOP 98-9")  Modifications  of
SOP 97-2, Software Revenue Recognition,  With Respect to Certain  Transactions."
SOP  98-9  extends  the  effective  date of SOP  98-4  and  provides  additional
interpretative  guidance. SOP 98-9 is effective for fiscal years beginning after
March 15, 2000.  The Company also follows the  interpretive  guidance of SAB 101
issued by The  Securities  and Exchange  Commission  and EITF issue 00-21 of the
AICPA Emerging Issues Task Force.

     Revenue from retail  product sales is recognized  upon sell through,  while
revenue from other product sales is recognized  upon shipment,  provided that no
significant  obligations remain and that collection of the resulting  receivable
is likely.  The Company  provides  for  estimated  sales  returns at the time of
shipment.  License  revenues are recognized when the software has been delivered
and all significant  obligations  have been met. Royalty revenues are recognized
as products  are  licensed  and sold by  licensees.  Revenues  from  development
contracts  are  primarily  generated  from  non-recurring  engineering  fees and
research  grants.  Revenue is  recognized  in  accordance  with the terms of the
grants and  agreements,  generally when collection is probable and related costs
have been incurred.

     Sources of Revenues.  To date,  the  Company's  revenues  have been derived
principally  from  end-users,  manufacturers,   retailers  and  distributors  of
computer  products in North  America,  Europe and the Pacific  Rim.  The Company
performs  periodic  credit  evaluations  of its  customers  and does not require
collateral.   The  Company  maintains  reserves  for  potential  credit  losses.
Historically,  such  losses  have been  insignificant  and  within  management's
expectations.

     Software Development Costs. Software development costs are accounted for in
accordance with Statement of Financial  Accounting Standards No. 86, "Accounting
for the Costs of Computer  Software to be Sold,  Leased or  Otherwise  Marketed"
("SFAS 86"). Under SFAS 86,  capitalization of software development costs begins
upon the establishment of technological  feasibility,  subject to net realizable
value considerations.  In the Company's case,  capitalization commences upon the
completion  of a working  model,  and  generally  ends upon the  release  of the
product. As of December 31, 2001, 2000, and 1999, such costs were insignificant.

     Significant   Customers.   Two   customers   accounted  for  16%  and  13%,
respectively,  of revenues in 2001. One customers  accounted for 16% of revenues
in 2000. One customer accounted for 27% of the Company's revenues in 1999.

     Research and  Development.  Research and  development  costs are charged to
expense as incurred.

     Foreign Currency Translation. The Company considers the functional currency
of the Joint Venture to be the respective local currency and, accordingly, gains
and  losses  from  the  translation  of the  local  foreign  currency  financial
statements are included as a component of "accumulated other comprehensive loss"
in the Company's  consolidated  balance sheets included in this Annual Report on

                                      -17-
<PAGE>

Form 10-K.  Foreign  currency  assets and  liabilities  are translated into U.S.
dollars  at  exchange  rates  prevailing  at the end of the  period  except  for
non-monetary  assets and liabilities which are translated at historical exchange
rates.  Revenues and expenses are  translated at the average  exchange  rates in
effect during each period,  except for those expenses  included in balance sheet
accounts which are translated at historical exchange rates.

     Net  foreign  currency   transaction  gains  and  losses  are  included  as
components of "interest income and other income (expense), net" in the Company's
consolidated  statements  of  operations  included in this Annual Report on Form
10-K.  Due to the  stability  of the  currency in China,  net  foreign  currency
transaction  gains and losses were not material for the year ended  December 31,
2001 and  2000,  respectively.  The  Company  recorded  a net  foreign  currency
transaction gain of $59,000 for the year ended December 31, 1999.

     Net  Operating  Loss  Carryforwards.   Utilization  of  the  Company's  net
operating  losses may be subject to an annual  limitation  due to the  ownership
change  limitations  provided by the  Internal  Revenue Code of 1986 and similar
state  provisions.  As a result,  a portion of the Company's net operating  loss
carryforwards may not be available to offset future taxable income.  The Company
has provided a full valuation  allowance for deferred tax assets at December 31,
2001 of $22 million based upon the Company's history of losses.

     The Company  reports in two segments,  handwriting  recognition and systems
integration.  For purposes of Management  Discussion  and Analysis,  handwriting
recognition includes  Online/Retail  revenues and Corporate sales, including OEM
and Enterprise revenues, and systems integration is referred to as China sales.

Results of Operations

Years Ended December 31, 2001 and December 31, 2000

     Revenues. Revenues decreased $1,365,000, or 19%, to $5,947,000 for the year
ended December 31, 2001, as compared to $7,312,000 in the prior year.

     Online revenues declined $285,000,  or 24%, to 913,000 in 2001, as compared
to $1,198,000 in the prior year period. The number of names available for use in
the  Company's  direct mail campaign has been reduced to newly  registered  palm
users,  and was the  primary  reason for the decline in  revenues.  In the prior
years the Company's  direct mail  campaigns  also targeted the installed base of
Palm users.

     Corporate  sales,  which  includes  Enterprise  and OEM  revenue  decreased
$893,000,  or 21%, to $3,310,000  (including the  nonrecurring  maintenance fees
from M10,  previously  PenOp) for the year ended December 31, 2001,  compared to
$4,203,000 in the prior year period.  Sales of the Company's  software solutions
and maintenance to end users  increased  $155,000 to $2,076,000 in 2001 compared
to  $1,921,000  in the prior year period.  The  decrease was due  primarily to a
$524,000  decrease  in the  nonrecurring  maintenance  fees,  from  M10 in  2001
compared to the prior year.  This decrease was offset by sales to Prudential and
TVA.  During the fourth  quarter of 2000,  the Company  engaged in a transaction
with PenOp to provide nonrecurring  maintenance services from pre-existing PenOp
contracts  in the  aggregate  amount  of $1.5  million,  of which  $352,000  and
$877,000  was  recorded  (net)  in 2001  and  2000,  respectively.  The  Company
previously  entered  into a separate  transaction,  to acquire the  intellectual
property  rights from PenOp (see note 1). OEM  revenues  included  in  corporate
sales decreased  $989,000 or 48% to $1,078,000 from $2,067,000 in the prior year
period.  This  decrease  was  due to a  reduction  in  the  amount  of  revenues
recognized  from Ericsson and other OEM's  compared to the prior year.  Revenues
from development  contracts included in corporate sales decreased $59,000 or 27%
to $156,000  from  $215,000  for the prior year due  primarily  to  decreases in
non-recurring engineering revenues.  Revenues from development contracts in 2001
and 2000 were  primarily  attributable  to porting of the Company's  software to
third party products such as smartphones and web browsers.

     China sales  decreased  $187,000,  or 10%, to $1,724,000 for the year ended
December 31, 2001, as compared to $1,911,000 in the prior year. The decrease was
due to a decrease in system integration sales of $202,000, or 13%, to $1,401,000
in 2001,  as compared to  $1,603,000  in the prior year.  The decrease in system

                                      -18-
<PAGE>

integration sales was offset by an increase in software sales of $15,000, or 5%,
to $323,000  in 2001 as  compared to $308,000 in the prior year.  The changes in
revenues are not related to any single customer.

     Cost of Sales. Cost of sales decreased $656,000,  or 23%, to $2,240,000 for
the year ended  December 31, 2001,  as compared to  $2,896,000 in the prior year
period.

     Online cost of sales  decreased  $282,000,  or 26%, to $805,000 in 2001, as
compared to $1,087,000 in the prior year. This decrease was due to lower mailing
costs  brought  about by the reduced  number of new names  available  in 2001 as
compared to 2000.

     Corporate sales costs decreased $126,000, or 30%, to $290,000 from $416,000
in the prior  year.  Costs  associated  with the  Company's  signature  software
solutions  decreased $36,000,  or 21%, to $135,000,  compared to $171,000 in the
prior year period.  The decrease in the cost of software  solutions was due to a
decrease  in amount  of third  party  hardware  costs  sold  with the  Company's
corporate   signature  software  products  during  2001  as  compared  to  2000.
Amortization of capitalized software costs was approximately $12,000 in 2001 and
2000, respectively. Costs of development contract revenues included in corporate
sales decreased $85,000, or 45%, to $105,000 in 2001, as compared to $190,000 in
the  prior  year.  The  decrease  in  development  contract  cost was due to the
reduction in non-recurring  engineering  projects during 2001 as compared to the
prior year period. OEM costs decreased $5,000, or 37%, to $38,000 as compared to
$43,000 in the prior year.  The  decrease  was due to a decrease in revenues and
the associated technology import tax from the Company's Japanese OEM customers.

     China cost of sales  decreased  $247,000,  or 18%, to $1,145,000 in 2001 as
compared to  $1,393,000  in the prior year  period.  The decrease was due to the
decrease in systems integration sales in 2001 as compared to the prior year.

     Gross Margin.  Gross margin  decreased  $709,000,  or 16%, to $3,707,000 in
2001, as compared to $4,416,000 in the prior year.

     Online  gross  margin  decreased  $3,000,  or 3%, to $108,000  in 2001,  as
compared to gross margins of $111,000 in the prior year period. The decrease was
due to the lower  sales  volumes as  compared  to the prior  year  offset by the
elimination of the follow-up mailer costs,  which were primarily used to convert
long-time  users of PDA's to the Company's more natural input  products.  Online
gross margins were 12% of sales for the year ended December 31, 2001.

     Corporate sales gross margin decreased  $767,000,  or 20%, to $3,020,000 in
2001, from $3,787,000 in the prior year period.  This decrease was primarily due
to the 21% decrease in Corporate sales as discussed above. Corporate sales gross
margin as a percentage  of sales was 91% and 90% of revenues for the years ended
December 31, 2001 and 2000, respectively.

     China sales gross margin  increased  $61,000,  or 12%, to $579,000 in 2001,
from $518,000 in the prior year. This increase was primarily due to the increase
in software  sales in 2001 as  discussed  above.  China sales gross  margin as a
percentage of sales increased 7% to 34% as compared to 27% in the prior year.

     Research  and  Development  Expenses.  Research  and  development  expenses
increased  $205,000,  or 11%, to $1,808,000 for the twelve months ended December
31, 2001,  as compared to  $1,603,000  for the prior year.  Salaries and related
costs decreased  $104,000,  or 9%, to $1,077,000 in 2001, compared to $1,181,000
in 2000.  This  decrease  was due to  reductions  in  headcount  during  2001 as
compared to 2000. Other costs, including shared development costs with the Joint
Venture,  facility  and other  costs  increased  $255,000  to  $342,000 in 2001,
compared to $87,000 in the prior year. The increase was due primarily to outside
engineering  costs  associated with the  assimilation of the PenOp  intellectual
property into the Company's  products and continued  support for new engineering
projects.  Other expenses including travel and related expenses and depreciation
decreased  6%, or $30,000,  as compared  to the prior year  period.  In addition
costs,  associated  with  development  contracts  and  charged  to cost of sales
decreased  $84,000 or 44% to $106,000 from $190,000 in the comparable prior year
period.  This  decrease  was  due  to  a  lower  number  of  revenue  generating
nonrecurring engineering projects in 2001 compared to the prior year.

     Sales and Marketing  Expenses.  Sales and  marketing  expenses for the year
ended December 31, 2001 decreased $185,000,  or 10%, to $2,054,000,  as compared
to $2,239,000 in the prior year.  Payroll and related  costs  decreased  12%, or

                                      -19-
<PAGE>

$93,000,  to $2,054,000 in 2001 from  $2,239,000  due primarily to a decrease in
headcount during the year.  Travel and related expenses  decreased  $58,000,  or
29%, to $140,000 in 2001,  compared to $198,000 in the prior year.  The decrease
was due to decreases in travel  related to the  reduction in headcount  from the
comparable prior year.  Advertising and promotion expense decreased $195,000, or
49%, to $203,000 in 2001,  from $398,000 in the prior year. The decrease was due
primarily to the one-time  cost of the  development  of a media  campaign in the
prior year related to the Company's Online sales via CIC's website. Professional
services expense  increases  $128,000,  or 129%, to $227,000 from $99,000 in the
comparable  prior  year  period.  The  increase  was  due to  marketing  studies
undertaken by the Company to assess the markets with the greatest  potential for
the  Company's  products.  Other costs,  such as  facilities  and  miscellaneous
expenses, increased $33,000, or 5%, in 2001 as compared to the prior year.

     General and Administrative  Expenses.  General and administrative  expenses
increased 34%, or $610,000,  to $2,791,000 for the year ended December 31, 2001,
from $2,181,000 for the prior year. The increase was primarily due to a increase
in patent  amortization  expense of $393,000,  or 914%, to $436,000 in 2001 from
$43,000 in the prior year. In addition  professional fees increased $274,000, or
105%,  to $535,000 from $261,000 in the  comparable  prior year  period.Investor
relations expenses  decreased $66,000,  or 15%, to $366,000 in 2001, as compared
to $432,000 in the  comparable  prior year.  The decrease was due primarily to a
reduction in costs  associated with  information  disseminated  through the wire
services.  Other expenses  including  travel,  facilities cost and provision for
uncollectable accounts increased $9,000 in 2001 as compared to the prior year.

     Interest Income and Other Income (Expense),  Net. Interest income and other
income  (expense)  net,  decreased  $60,000,  or 79%,  to $16,000 in 2001,  from
$76,000 in the prior  year.  This  decrease  resulted  from a  decrease  in cash
balances and interest rates during the year.  The interest  income was offset by
fees  associated   with  credit  card  sales  from  the  Company's   website  of
approximately $37,000 in 2001, compared to $49,000 in the prior year.

     Interest Expense.  Interest expense increased  $16,000,  or 6%, in 2001, to
$282,000 from $266,000 in the prior year.  This increase was due to the increase
in long-term debt outstanding since June of 2001.

Years Ended December 31, 2000 and December 31, 1999

     Revenues.  Revenues increased $794,000,  or 12%, to $7,312,000 for the year
ended December 31, 2000, as compared to $6,518,000 in the prior year.

     Online  revenues  declined  $477,000,  or 28%,  to  1,198,000  in 2000,  as
compared to $1,675,000 in the prior year period.  In 1999,  the Company was able
to draw on a large number of previously  unsolicited names during the first year
of the direct mail  campaign.  In 2000, the number of names was reduced to newly
registered  Palm users,  and was the primary reason for the decline in revenues.
Sales of the Company's Handwriter products for the years ended December 31, 2000
and  1999,  respectively,  were  insignificant.  The  Company  discontinued  the
Handwriter  products  in 1998,  and sold the  remaining  inventory  over the web
through the second quarter of 1999.

     Corporate  sales,  which  includes  Enterprise  and OEM  revenue  increased
$980,000,  or 30%, to $4,203,000  (including the  nonrecurring  maintenance fees
from M10,  previously  PenOp) for the year ended  December 31, 2000  compared to
$3,223,000 in the prior year period.  Sales of the Company's  software solutions
and  maintenance  to end  users  increased  $1,805,000  to  $1,921,000  in 2000,
compared to $116,000 in the prior year period. The increase was due primarily to
nonrecurring  maintenance fees, from M10, and the sale of software solutions and
maintenance  revenues to Charles Schwab,  Assurant,  Orange County,  E-Com,  and
others in 2000.  During the fourth  quarter of 2000,  the  Company  engaged in a
transaction  with  PenOp  to  provide  nonrecurring  maintenance  services  from
pre-existing  PenOp contracts in the aggregate amount of $1.5 million,  of which
$877,000  was recorded  (net).  The Company  previously  entered into a separate
transaction,  to acquire the  intellectual  property rights from PenOp (see note
1). OEM revenues  included in corporate  sales  decreased  $574,000,  or 22%, to
$2,067,000, from $2,641,000 in the prior year period. This decrease was due to a
reduction  in the amount of revenues  recognized  from  Ericsson and other OEM's
compared to the prior year.  Revenues  from  development  contracts  included in
corporate sales decreased $251,000,  or 54%, to $215,000,  from $466,000 for the
prior year due primarily to decreases in non-recurring engineering ("NRE")

                                      -20-
<PAGE>

revenues.  Revenues from  development  contracts in 2000 and 1999 were primarily
attributable  to porting of the Company's  software to third party products such
as smartphones and web browsers.

     China sales  increased  $291,000,  or 18%, to $1,911,000 for the year ended
December 31, 2000, as compared to $1,620,000 in the prior year.  The increase is
due to increased  sales  activity in 2000, and not related to any one-time large
sale to a single customer.

     Cost of Sales. Cost of sales decreased $421,000,  or 13%, to $2,896,000 for
the year ended  December 31, 2000,  as compared to  $3,317,000 in the prior year
period.

     Online cost of sales decreased $745,000,  or 41%, to $1,087,000 in 2000, as
compared to  $1,832,000  in the prior year.  This decrease is due to the reduced
number of new names  available in 2000, as compared to 1999, and the elimination
of mailing costs associated with follow-up mailers sent after initial contact.

     Corporate sales costs increased $91,000,  or 28%, to $416,000 from $325,000
in the prior  year.  Costs  associated  with the  Company's  signature  software
solutions increased to $167,000, and was due to $155,000 in third party hardware
costs sold with the Company's  corporate  signature  software solution products,
and $12,000 in  amortization of capitalized  software costs.  The Company had no
significant costs associated with its off-the-shelf  signature solution products
sold in 1999,  due to the low volume of  revenues  generated  compared  to 2000.
Costs of development  contract  revenues  included in corporate  sales decreased
$71,000, or 27%, to $190,000 in 2000, as compared to $261,000 in the prior year.
The  decrease  in  development   contract  cost  is  due  to  the  reduction  in
non-recurring  engineering  projects  during  2000 as compared to the prior year
period. OEM costs decreased $5,000, or 8%, to $59,000, as compared to $64,000 in
the prior year. The decrease is due to a decrease in revenues and the associated
technology import tax from the Company's Japanese OEM customers.

     China cost of sales increased  $233,000,  or 20%, to $1,393,000 in 2000, as
compared to  $1,160,000  in the prior year  period.  The increase was due to the
increase in sales activity in 2000 as compared to the prior year.

     Gross Margin. Gross margin increased  $1,215,000,  or 38%, to $4,416,000 in
2000, as compared to $3,201,000 in the prior year.

     Online gross margin increased  $268,000 to $111,000 in 2000, as compared to
a gross margin loss of $157,000 in the prior year  period.  The increase was due
to the change in the mix of names from new and long time users of Palm  products
to newly  registered Palm users.  The change in the mix of names has allowed the
Company to eliminate the follow-up mailers, primarily used to attempt to convert
long time users of PDA's to the Company's  more natural input  products.  Online
gross margins were 91% of sales for the year ended December 31, 2000.

     Corporate sales gross margin increased  $889,000,  or 31%, to $3,787,000 in
2000, from  $2,898,000 in the prior year period.  This increase is primarily due
to the 30% increase in Corporate  sales discussed  above.  Corporate sales gross
margin  as a  percentage  of sales was 90% for the  years  ended  2000 and 1999,
respectively.

     China sales gross margin  increased  $58,000,  or 13%, to $518,000 in 2000,
from  $460,000 in the prior year.  This  increase  is  primarily  due to the 18%
increase in sales in 2000 as discussed above. China gross margin as a percentage
of sales declined 1% to 27% as compared to 28% in the prior year.

     Research  and  Development  Expenses.  Research  and  development  expenses
increased  $240,000,  or 18%, to $1,603,000 for the twelve months ended December
31, 2000,  as compared to  $1,363,000  for the prior year.  Salaries and related
costs increased $46,000, or 4%, to $1,181,000 in 2000, compared to $1,135,000 in
1999.  This increase is due to additional  headcount  during 2000 compared 1999.
Other costs, including shared development costs with the Joint Venture, facility
and other  costs  increased  $122,000 in 2000  compared  to the prior  year.  In
addition  costs,  associated with  development  contracts and charged to cost of
sales  decreased  $72,000.  This  decrease  was  due  to  reduced  revenue  from
non-recurring engineering projects in 2000 as compared to the prior year.

     Sales and Marketing  Expenses.  Sales and  marketing  expenses for the year
ended December 31, 2000, increased $362,000, or 19%, compared to the prior year.

                                      -21-
<PAGE>

Payroll and related costs in 2000 increased  16%, or $110,000,  due primarily to
increased  headcount  during the year.  Travel and  related  expenses  increased
$77,000,  or 64%, in 2000  compared to the prior year.  The  increase was due to
increases in travel  related to sales and marketing  activities  compared to the
prior year.  Advertising and promotion expense increased  $210,000,  or 112%, to
$398,000 in 2000,  from  $188,000 in the prior year.  The  increase was due to a
$76,000, or 90%, increase in media placement costs and $134,000 or 107% increase
in trade show and printed  marketing  materials  expenses  compared to the prior
year.  Other costs,  such as facilities and  miscellaneous  expenses,  decreased
$35,000, or 4%, in 2000 to $866,000 from $901,000 in the prior year.

     General and Administrative  Expenses.  General and administrative  expenses
increased 30%, or $498,000,  to $2,181,000 for the year ended December 31, 2000,
from $1,683,000 for the prior year.  Payroll and related costs in 2000 increased
13%, or  $132,000,  due to the addition of key  management  in late 1999 and the
third quarter of 2000. Investor relations expenses increased $218,000,  or 102%,
to $432,000 in 2000,  as compared to $214,000 in the prior year.  This  increase
was  due  to  additional  NASDAQ  listing  fees,  and  the  increased  costs  of
disseminating  information  due to the increased  interest in the Company in the
fourth  quarter of 1999 and the first  quarter of 2000.  Director  and  officers
insurance expense  increased  $44,000 in 2000, due to the increased  activity in
the  Company's  stock.  Patent  amortization  due to the  capitalization  of the
intellectual  property  from the PenOp  acquisition  increased  $28,000 over the
prior year. Other expenses including travel,  professional services,  facilities
cost and  provision  for  uncollectable  accounts  increased  $76,000 in 2000 as
compared to the prior year.

     Interest Income and Other Income (Expense),  Net. Interest income and other
income  (expense)  net,  increased  $21,000,  or 38%,  to $76,000 in 2000,  from
$55,000 in the prior year.  This increase  resulted from an increase in interest
income due to higher cash  balances  during the year.  The  increase in interest
income was offset by fees  associated  with credit card sales from the Company's
website of approximately $49,000 in 2000, compared to $59,000 in the prior year.

     Interest Expense. Interest expense increased $193,000, or 264%, in 2000, to
$266,000  compared  to  $73,000  in the  prior  year.  This  increase  is due to
long-term debt  outstanding  for the full year and the  amortization of the loan
discount associated with warrants issued in connection with the long term debt.

Liquidity and Capital Resources

     Cash and cash equivalents at December 31, 2001 totaled $2,588,000, compared
to cash and cash  equivalents of $2,349,000 at December 31, 2000.  This increase
was  primarily   attributable  to  $2,456,000  of  cash  provided  by  financing
activities,  offset by $2,159,000 used in operations and $58,000 of cash used in
investing  activities in 2001.  In 2001,  the effect of exchange rate changes on
cash was immaterial.

     At December 31, 2001, current liabilities,  which include deferred revenue,
were  $882,000.  Deferred  revenue,  totaling  $88,000  at  December  31,  2001,
primarily  reflects  advance  service  contract fees received from the Company's
licensees which are generally recognized as revenue by the Company in the period
in which the service work is completed.

     As of December 31, 2001,  the Company's  principal  source of liquidity was
its cash and cash  equivalents of $2,588,000.  In each year since its inception,
the Company has incurred losses. Although there can be no assurance, the Company
believes that its current cash and resources, together with the expected revenue
levels,  will provide  sufficient funds for planned  operations for at least the
next twelve months.  However, if the Company is unable to generate adequate cash
flow from sales, or if expenditures  required to achieve the Company's plans are
greater than expected, the Company may need to obtain additional funds or reduce
discretionary spending.  There can be no assurance that additional funds will be
available  when  needed,  or if available  will be on favorable  terms or in the
amounts  required by the  Company.  If  adequate  funds are not  available  when
needed,  the Company may be required to delay,  scale back or eliminate  some or
all of its marketing and development  efforts or other  operations,  which could
have a material adverse effect on the Company's business,  results of operations
and prospects.

                                      -22-
<PAGE>

     Financing.On  August  23,  2001,  the  Company's  90% owned  Joint  Venture
borrowed the aggregate  equivalent of $181,000  denominated in Chinese currency,
from a  Chinese  bank.  The loan  bears  interest  at 5.37% per annum and is due
August 23, 2002.  The  borrowing  did not require the Joint Venture to deposit a
compensating balance.

     On September 1, and  September  19, 2000,  respectively,  the Company's 90%
owned Joint Venture  borrowed,  in two transactions the aggregate  equivalent of
$120,000,  denominated in Chinese currency,  from a Chinese bank. The loans bore
interest at 5.12% and were due on March 2, and March 19, 2001, respectively. The
borrowings did not require a compensating  balance. The notes were paid in March
2001.

     On June 19, 2001, the Company consummated a three-year $3 million financing
(the "Loan") with a charitable  remainder annuity trust of which the trustee was
a former director and officer of the Company (the "Trust").  The proceeds of the
Loan were used to refinance $1,500,000 of indebtedness  outstanding to the Trust
pursuant to a loan made by the Trust to the Company in October  1999(see below),
and for working capital purposes. The Loan bears interest at the rate of 2% over
the prime rate publicly announced by Citibank N. A. from time to time, which was
8.00% per annum at September 30, 2001, and is due June 18, 2004. The Loan may be
pre-paid by the Company in whole or in part at any time without penalty, subject
to the right of the Trust to convert  the  outstanding  principal  amount of the
Loan into shares of common stock.  Pursuant to the terms of the Loan,  the Trust
has the option, at any time prior to maturity,  to convert all or any portion of
the outstanding  principal amount of the Loan into shares of common stock of the
Company at a conversion price of $2.00 per share, subject to adjustment upon the
occurrence  of certain  events.  If, prior to maturity of the Loan,  the Company
consummates  one or more  financings  providing  $5  million  or  more in  gross
proceeds,  the Company is required to apply 50% of the  proceeds in excess of $5
million  to the then  outstanding  principal  amount  of the  Loan.  The Loan is
secured  by a  first  priority  security  interest  in  and  lien  on all of the
Company's assets as now owned or hereafter acquired by the Company.

     In connection with the Loan, the Company entered into a registration rights
agreement  with the Trust which  obligates  the  Company to file a  registration
statement with the Securities and Exchange  Commission  covering the sale of the
shares of the Company's  common stock issuable upon conversion of the Loan if it
receives a demand by the holder of the Loan to do so, and to use its  reasonable
best efforts to cause such registration statement to become effective.


     In June 1999, the Company obtained a bridge loan (the "Bridge Loan") in the
amount  of  $500,000  from a  charitable  remainder  annuity  trust,  of which a
director and officer of the Company is a trustee.  The Bridge Loan was increased
by $150,000 and $100,000 in August and  September  1999,  respectively.  Amounts
outstanding  under the Bridge Loan bore  interest at the prime rate plus 2%. The
loan  was  secured  by  the  Company's  cash,   accounts  receivable  and  other
receivables as then owned or thereafter acquired by the Company. The Bridge Loan
plus accrued interest was due December 31, 1999.

     In October 1999,  the Company  entered into a loan  agreement with the same
charitable  remainder  annuity trust,  whereby the then existing  Bridge Loan of
$750,000 was converted  into a long-term  loan in the amount of $1,500,000  (the
"1999 Loan"). The 1999 Loan was secured by a first priority security interest in
all of the Company's  assets as now owned or hereafter  acquired by the Company.
The 1999 Loan bore  interest at the rate of 2% over the prime rate as  published
by  Citibank  from time to time.  In , in  connection  with the 1999  Loan,  the
Company  issued to the charitable  remainder  annuity trust warrants to purchase
300,000 shares of the Company's  common stock.  The Company  ascribed a value of
$179,000 to these  warrants,  which was  amortized to the  Company's  results of
operations over the life of the warrant. The fair value ascribed to the warrants
was estimated on the date of issuance using the Black-Scholes pricing model with
the following assumptions:  risk-free interest rate of 5.50%; expected life of 2
years;  expected  volatility  of 99%;  and  expected  dividend  yield of 0%. The
warrants  had an exercise  price of $1.09 per share.  On January 20,  2000,  the
charitable  remainder trust, of which a director and officer of the Company is a
trustee, exercised all 300,000 warrants issued in connection with the $1,500,000
long-term  debt.  The  warrants  were  exercised  under  the  cashless  exercise
provision in the warrant  agreement.  The Company issued  approximately  255,000
shares of common stock in exchange for the 300,000 warrants.

     Operating Lease  Commitments.  The Company leases  facilities in the United
States and China.  The Company's rental expense for the years ended December 31,
2001, and 2000 was approximately $443,000 and $390,000,  respectively.  Sublease

                                      -23-
<PAGE>

income was  approximately  $35,000 and $105,000 for the years ended December 31,
2001 and 2000, respectively.  Future minimum lease payments under non-cancelable
operating leases are expected to be approximately  $397,000 for the years ending
December 31, 2002.

On  October  2, 2001 the  Company  entered  a new five  year  lease for its
existing  principal  offices at 275 Shoreline  Drive,  Suite 500, Redwood Shores
California for approximately  9,634 square feet. The lease commenced on November
1, 2001, with first year lease costs of approximately  $347,000. The cost of the
lease will increase  approximately 3% per annum over the term of the lease which
expires on October 31, 2006. In addition to the base rent the Company will pay a
percentage of the increase,  if any, in operating  cost incurred by the landlord
in such year over the  operating  expenses  incurred by the landlord in the base
year.  The Company  believes the offices will be adequate for its needs over the
term of the lease.

Volatility of Stock Price

     The Company's  stock price may be subject to  significant  volatility.  The
public stock markets have experienced  significant volatility in stock prices in
recent  years.  The  stock  prices  of  technology  companies  have  experienced
particularly high volatility, including, at times, severe price changes that are
unrelated or  disproportionate  to the operating  performance of such companies.
The  trading  price of the  Company's  Common  Stock  could be  subject  to wide
fluctuations in response to, among other factors,  quarter to quarter variations
in operating results, announcements of technological innovations or new products
by the Company or its competitors,  announcements of new strategic relationships
by the Company or its competitors,  general  conditions in the computer industry
or the global economy generally, or market volatility unrelated to the Company's
business and operating results.

Item 8. Financial Statements and Supplementary Data

     The Company's audited consolidated financial statements for the years ended
December 31,  2001,  2000,  and 1999 begin on page F-1 of this Annual  Report on
Form 10-K.

Item 9.   Changes in and  Disagreements  with  Accountants  on Accounting and
          Financial Disclosure

          None

                                    PART III

Item 10. Directors and Executive Officers of the Registrant

     Information  with respect to this Item is  incorporated by reference to the
Company's  definitive  proxy  statement  with  respect to its Annual  Meeting of
Stockholders expected to be held on June 24, 2002.

Item 11. Executive Compensation

     Information  with respect to this Item is  incorporated by reference to the
Company's  definitive  proxy  statement  with  respect to its Annual  Meeting of
Stockholders expected to be held on June 24, 2002.

Item 12. Security Ownership of Certain Beneficial Owners and Management

     Information  with respect to this Item is  incorporated by reference to the
Company's  definitive  proxy  statement  with  respect to its Annual  Meeting of
Stockholders expected to be held on June 24, 2002.

Item 13. Certain Relationships and Related Transactions

     Information  with respect to this Item is  incorporated by reference to the
Company's  definitive  proxy  statement  with  respect to its Annual  Meeting of
Stockholders expected to be held on June 24, 2002.

                                      -24-
<PAGE>



                                                                PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

                          Index to Financial Statements

                                                                           Page
(a)(1) Financial Statements
   Report of Stonefield Josephson, Inc., Independent Auditors..........     F-1
   Consolidated Balance Sheets at December 31, 2001 and 2000...........     F-2
   Consolidated Statements of Operations for the years ended
     December 31, 2001, 2000, and 1999.................................     F-3
   Consolidated Statements of Changes in Stockholders' Equity
    (Deficit) for the years ended December 31, 2000, 1999 and 1998.....     F-4
   Consolidated Statements of Cash Flows for the years
     ended December 31, 2000, 1999 and 1998............................     F-5
   Notes to Consolidated Financial Statements..........................     F-6
(a)(2) Financial Statement Schedule
   Schedule II Valuation and Qualifying Accounts and Reserves..........     S-1

(b) Reports on Form 8-K

     None

(c) Exhibits

  Exhibit                               Document
   Number

     2.0  Second  Amended Plan of  Reorganization  of the Company,  incorporated
          herein by reference to the Company's Form 8-K filed October 24, 1994.
     2.1  Orderly Liquidation Valuation, Exhibit F to the Second Amended Plan of
          Reorganization, incorporated herein by reference to the Company's Form
          8-K filed October 19, 1994.
     2.2  Order  Confirming  Plan  of  Reorganization,  incorporated  herein  by
          reference to the Company's Form 8-K filed November 14, 1994.
     3.1  Certificate of Incorporation of the Company, as amended,  incorporated
          herein by reference to Exhibits 3.1, 3.2, 3.3 and 3.4 to the Company's
          Registration Statement on Form 10 (File No. 0-19301).
     3.2  Certificate of Amendment to the Company's Certificate of Incorporation
          (authorizing  the  reclassification  of the  Class A Common  Stock and
          Class B Common Stock into one class of Common Stock) as filed with the
          Delaware Secretary of State's office on November 1, 1991, incorporated
          herein  by  reference  to  Exhibit 3 to  Amendment  1 on Form 8 to the
          Company's Form 8-A (File No. 0-19301).
     3.3  By-laws of the Company adopted on October 6, 1986, incorporated herein
          by reference to Exhibit 3.5 to the Company's Registration Statement on
          Form 10 (File No. 0-19301).
     4.1  1984 Stock Option Plan of the  Company,  as amended and restated as of
          October 15, 1987 and as amended by resolutions of the  stockholders of
          the Company  passed on August 15, 1989 and October 8, 1990 to increase
          the aggregate shares covered thereby to 1,000,000, incorporated herein
          by reference to Exhibit 4.4 to the Company's Registration Statement on
          Form 10 (File No. 0-19301).
     4.2  Form of Stock Option Grant under 1984 Stock Option Plan,  incorporated
          herein by  reference  to  Exhibit  4.5 to the  Company's  Registration
          Statement on Form 10 (File No. 0-19301).
     4.3  1991  Stock  Option  Plan  of  the  Company,  incorporated  herein  by
          reference to Exhibit 4.5 of the Company's  Form S-1 dated December 23,
          1991 (Registration No. 33-43879).
     4.4  1991  Non-Discretionary  Stock  Option  Plan,  incorporated  herein by
          reference to Exhibit 4.6 of the Company's  Form S-1 dated December 23,
          1991 (Registration No. 33-43879).

                                      -25-
<PAGE>

     4.5  Form of  Incentive  Stock  Option  Grant under 1991 Stock Option Plan,
          incorporated  herein by reference to Exhibit 4.7 of the Company's Form
          S-1 dated December 23, 1991 (Registration No. 33-43879).
     4.6  Form of Non-Qualified Stock Option Grant under 1991 Stock Option Plan,
          incorporated  herein by reference to Exhibit 4.8 of the Company's Form
          S-1 dated December 23, 1991 (Registration No. 33-43879).
     4.7  Form of Stock Option Grant under 1991  Non-Discretionary  Stock Option
          Plan, incorporated herein by reference to Exhibit 4.9 of the Company's
          Form S-1 dated December 23, 1991 (Registration No. 33-43879).
     4.8  1994 Stock Option Plan,  incorporated herein by reference to Exhibit G
          of the Company's Second Amended Disclosure Statement filed on Form 8-K
          dated  October 19, 1994 and approved by  shareholders  on November 14,
          1994.
     4.9  Form of  Warrant  of the  Company  dated  March  28,  1997  issued  in
          connection   with  the  Waiver  by  and  among  the  Company  and  the
          signatories  thereto,  incorporated herein by reference to Exhibit 4.9
          of the Company's 1996 Form 10-K (File No. 0-19301).
     4.10 1999 Stock Option Plan,  incorporated herein by reference to Exhibit A
          of the Company's  Definitive  Proxy Statement filed on May 4, 1999 and
          approved by shareholders on June 7, 1999.
              .
     +10.1Licensing and  Development  Agreement for Use and Marketing of Program
          Materials   dated   September   25,  1992   between  the  Company  and
          International  Business Machines  Corporation,  incorporated herein by
          reference to Exhibit 10.13 of the  Company's  1992 Form 10-K (File No.
          0-19301)
     10.2 Standby  Stock  Purchase  Agreement  between  the  Company  and Philip
          Sassower  dated October 3, 1994,  incorporated  herein by reference to
          Exhibit 10.13 of the Company's 1994 Form 10-K (File No. 0-19301)
     10.3 Form of Subscription Agreement between the Company and the Purchasers,
          dated November 28, 1995, incorporated herein by reference to Exhibit 1
          of the Company's Form 8-K dated November 28, 1995.
     10.4 Form of  Registration  Rights  Agreement  between  the Company and the
          Purchasers,  dated November 28, 1995, incorporated herein by reference
          to Exhibit 1 of the Company's Form 8-K dated November 28, 1995.
     10.5 Form of Warrant of the Company  issued to Libra  Investments,  Inc. on
          November  28, 1995,  incorporated  herein by reference to Exhibit 1 of
          the Company's Form 8-K dated November 28, 1995.
     10.6 Form of Registration  Rights  Agreement  between the Company and Libra
          Investments,  Inc.,  dated November 28, 1995,  incorporated  herein by
          reference to Exhibit 1 of the  Company's  Form 8-K dated  November 28,
          1995.
     10.7 Form  of  Subscription  Agreement  between  the  Company  and  various
          investors,  dated June 13, 1996,  incorporated  herein by reference to
          Exhibit 1 of the Company's Form 8-K dated June 27, 1996.
     10.8 Form of Registration  Rights Agreement between the Company and various
          investors,  dated June 13, 1996,  incorporated  herein by reference to
          Exhibit 2 of the Company's Form 8-K dated June 27, 1996.
     10.9 Form of Preferred Stock Investment Agreement, dated as of December 31,
          1996,  between  the  Company  and the  investors  listed on Schedule 1
          thereto,  incorporated  herein  by  reference  to  Exhibit  1  of  the
          Company's Form 8-K dated December 31, 1996.
     10.10Form of  Registration  Rights  Agreement  between  the Company and the
          Investors  Listed  on  Schedule  1  thereto,  incorporated  herein  by
          reference to Exhibit 2 of the  Company's  Form 8-K dated  December 31,
          1996.
     10.11Form of  Certificate of Designation of the Company with respect to the
          5% Cumulative  Convertible  Preferred  Stock,  incorporated  herein by
          reference to Exhibit 3 of the  Company's  Form 8-K dated  December 31,
          1996.
     10.12Waiver,  dated March 26, 1997,  effective  December  31, 1996,  by and
          among the Company and the signatories thereto,  incorporated herein by
          reference to Exhibit 10.19 of the  Company's  1996 Form 10-K (File No.
          0-19301).

                                      -26-
<PAGE>

     10.13Form  of   Subscription   Agreement   between  the  Company  and  each
          subscriber,  dated as of November  25,  1997,  incorporated  herein by
          reference to Exhibit 10.1 of the Company's  Form 8-K dated December 3,
          1997.
     10.14Certificate of  Designations of the Company with respect to the Series
          B 5% Cumulative  Convertible  Preferred Stock,  incorporated herein by
          reference to Exhibit 10.2 of the Company's Form 8-K dated November 13,
          1997.
     10.15Form of Registration  Rights  Agreement,  by and among the Company and
          the signatories thereto,  dated as of November 25, 1997,  incorporated
          herein by reference to Exhibit  10.3 to the  Company's  Form 8-K dated
          November 13, 1997.
     10.16Amendment to the Company's  Certificate of Designation with respect to
          the 5%  Cumulative  Convertible  Preferred  Stock dated June 12, 1998,
          incorporated  herein by  reference to Exhibit  10.23 of the  Company's
          1998 Form 10-K (File No. 0-19301).
     10.17Amendment  to  the  Company's  Amended  and  Restated  Certificate  of
          Incorporation dated June 12, 1998, incorporated herein by reference to
          Exhibit 10.24 of the Company's 1998 Form 10-K (File No. 0-19301).
     10.18Employment  Agreement  dated August 14, 1998 between James Dao and the
          Company,  incorporated  herein by  reference  to Exhibit  10.25 of the
          Company's 1998 Form 10-K (File No. 0-19301).
     ++10.19 Software  Development and License  Agreement dated December 4, 1998
          between   Ericsson   Mobile   Communications   AB  and  the   Company,
          incorporated  herein by  reference to Exhibit  10.26 of the  Company's
          1998 Form 10-K (File No. 0-19301).
     10.20Loan and Warrant  Agreement dated October 20, 1999 between the Company
          and the Philip S. Sassower 1996 Charitable Remainder Annuity Trust.
     10-21Asset Purchase  Agreement  between the Company and PenOp Ltd and PenOp
          Inc., incorporated herein by reference to the Company's Form 8-K dated
          October 6, 2000.
     10-22Loan  dated  June 19,  2001  between  the  Company  and the  Philip S.
          Sassower 1996 Charitable Remainder Annuity Trust.
     *21.1 Schedule of Subsidiaries.
     *23.1Consent of Stonefield Josephson, Accountancy Corporation,  Independent
          Accountants.

     +    Confidential  treatment of certain  portions of this exhibit have been
          previously  granted  pursuant to a request for  confidentiality  dated
          March 29, 1993, filed pursuant to the Securities Exchange Act of 1934.

     *    Filed herewith.

     ++   Confidential  treatment of certain  portions of this exhibit have been
          requested from the SEC pursuant to a request for confidentiality dated
          March 30, 1999,  filed  pursuant to the Securities and Exchange Act of
          1934.


                                      -27-
<PAGE>


                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Redwood
Shores, State of California, on March 28, 2001.

                                        COMMUNICATION INTELLIGENCE CORP.
                                        By:
                                                /s/ Guido DiGregorio
                                           _____________________________
                                                   Guido DiGregorio
                                      President and Chief Executive Officer and
                                                Chairman of the Board

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed below by the  following  persons on behalf of  Registrant
and in the capacities indicated on March 28, 2001.

     Signature                                  Title


  /s/ Guido DiGregorio       Chairman, President and Chief Executive Officer
___________________________  (Principal Executive Officer)
    Guido DiGregorio

 /s/ Francis V. Dane         Chief Legal Officer and Acting Chief Financial
___________________________  Officer(Principal Financial and Accounting Officer)
     Francis V. Dane

 /s/ Michael Farese          Director
___________________________
     Michael Farese

 /s/ Louis Panetta           Director
___________________________
     Louis Panetta

 /s/ Chien Bor Sung          Director
___________________________
     Chien Bor Sung



                                      -28-
<PAGE>

                          Independent Auditors Report


Board of Directors and Stockholders of
Communication Intelligence Corporation
Redwood Shores, California


We have audited the  accompanying  consolidated  balance sheets of Communication
Intelligence Corporation and its subsidiary as of December 31, 2001 and 2000 and
the related  consolidated  statements of  operations,  changes in  stockholders'
equity (deficit),  cash flows and financial  statement  schedule for each of the
three  years in the  period  ended  December  31,  2001,  as listed in the index
appearing under Item 14(a)(1) and (2) of this Annual Report on Form 10-K.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts  and the  disclosures  in the  financial  statements.  An audit also
includes assessing the accounting principles used and significant estimates made
by  management,   as  well  as  evaluating  the  overall   financial   statement
presentation.  We believe  that our audit  provides a  reasonable  basis for our
opinion.

In our opinion the consolidated  financial  statements and financial  statements
schedule  listed in the index  appearing  under  Item  14(a)(1)  and (2) of this
Annual  Report  on Form 10-K  present  fairly,  in all  material  respects,  the
financial   position  of   Communication   Intelligence   Corporation   and  its
subsidiaries  ("the  Company") as of December 31, 2001, and 2000 and the results
of their  operations  and their  cash  flows for each of the three  years in the
period  ended  December 31,  2001,  in  conformity  with  accounting  principles
generally accepted in the United States of America.




STONEFIELD JOSEPHSON INC.
Certified Public Accountants

San Francisco, California
February 18, 2002


                                      F-1
<PAGE>
                     Communication Intelligence Corporation
                           Consolidated Balance Sheets
                    (In thousands, except par value amounts)


                                                          December 31,
                                               ---------------------------------
                                                     2001              2000
                                               ---------------------------------

Assets
Current assets:
  Cash and cash equivalents..................   $    2,588        $    2,349
  Accounts receivable, including
  $350 from M10 (Previously PenOp) at
  December31, 2000 net of allowances of $278
  and $118 at December 31, 2001 and
  2000,respectively..........................        1,043             1,760
  Inventories................................          129               171
  Prepaid expenses and other current assets..          139               270
                                               ---------------   ---------------
        Total current assets.................        3,899             4,550

Note receivable from officer.................            -                46
Property and equipment, net..................          161               262
Patents and trademarks.......................        5,799             6,234
Other assets.................................          213               210
                                               ---------------   ---------------
        Total assets.........................   $   10,072        $   11,302
                                               ===============   ===============


Liabilities and Stockholders' Equity
Current liabilities:
  Accounts payable...........................   $      206        $      679
  Short-term debt............................          181               120
  Accrued compensation.......................          208               263
  Other accrued liabilities..................          199               318
  Deferred revenue...........................           88                61
                                               ---------------   ---------------
        Total current liabilities............          882             1,441


Long-term debt - related party...............        3,000             1,427

Minority interest............................          130               127

Commitments

Stockholders' equity:
  Common stock, $.01 par value; 100,000
  shares authorized; 90,912 and 89,668 shares
  issued and outstanding at December 31, 2001
  and 2000, respectively.....................          909               897
  Additional paid-in capital.................       81,605            80,656
  Accumulated deficit........................      (76,258)          (73,043)
  Accumulated other comprehensive loss.......         (196)             (203)
                                               ---------------   ---------------

Total stockholders' equity...................        6,060             8,307
                                               ---------------   ---------------


 Total liabilities and stockholders' equity..   $   10,072        $   11,302
                                               ===============   ===============

           See accompanying Notes to Consolidated Financial Statements


                                      F-2
<PAGE>
                     Communication Intelligence Corporation
                      Consolidated Statements of Operations
                    (In thousands, except per share amounts)

                                               Years ended December 31,
                                     -------------------------------------------
                                          2001           2000          1999
                                     -------------------------------------------

Revenues:
  Online..........................  $      913     $    1,198    $    1,675
  Corporate.......................       2,958          3,326         3,223
   Nonrecurring maintenance
   fees - M10 (Previously PenOp)..         352            877             -

  China...........................       1,724          1,911         1,620
                                     -------------- ----------------------------
                                         5,947          7,312         6,518
                                     -------------- ----------------------------
Operating costs and expenses:
   Cost of sales:
     Online........................        805          1,087         1,832
     Corporate.....................        290            416           325
     China.........................      1,145          1,393         1,160
   Research and development........      1,808          1,603         1,363
   Sales and marketing.............      2,054          2,239         1,877
   General and administrative......      2,791          2,181         1,683
                                     -------------- ----------------------------


                                         8,893          8,919         8,240
                                     -------------- ----------------------------

Loss from operations..............      (2,946)        (1,607)       (1,722)

Interest income and other income
(expense), net....................          16             76            55
Interest expense..................        (282)          (266)          (73)
Minority interest.................          (3)            (2)            -
                                     -------------- ----------------------------


Net loss.........................   $   (3,215)    $   (1,799)   $   (1,740)
                                     ============== ============================
Basic and diluted loss per
share............................   $    (0.04)    $    (0.02)   $    (0.02)
                                     ============== ============================

Weighted average shares..........       90,571         85,324        79,625
                                     ============== ============================



           See accompanying Notes to Consolidated Financial Statements


                                      F-3
<PAGE>


                     Communication Intelligence Corporation
      Consolidated Statements of Changes in Stockholders' Equity (Deficit)
                                 (In thousands)


                                                           Accumulated
                                     Additional               Other
                             Common   Paid-In  Accumulated Comprehensive
                             Stock    Capital    Deficit       Loss       Total

            --------------------------------------------------------------------
Balances
as of  December 31, 1998....  $785    $70,205    $(69,504)    $(154)    $1,332
Issuance of 300 warrants in
  connection with Long-term
  debt.......................    -        179           -         -        179
Exercise of options for
  3,421 shares of Common
  Stock......................   34      1,802           -         -      1,836
Exercise of 329 warrants for
  329 shares of Common Stock.    3        797           -         -        800
Foreign currency translation
  adjustment.................    -         -            -       (58)       (58)
Net loss.....................    -         -       (1,740)        -     (1,740)
                              --------------------------------------------------
Balances as of December 31,
  1999.......................  $822   $72,983     $(71,244)   $(212)    $2,349
                              --------------------------------------------------
Exercise of 2,352 options
  for 2,352 shares of Common
  Stock......................  $24    $1,559             -        -     $1,583
Exercise of 406 warrants for
  361 shares of Common Stock.    4       433             -        -        437
Issuance of 4,700 shares of
  Common Stock in exchange
  for intellectual property
  of PenOp Ltd...............   47     5,681             -        -      5,728
Foreign currency translation
  adjustment.................    -        -              -        9          9
Net loss.....................    -        -         (1,799)       -     (1,799)
                              --------------------------------------------------
Balances as of December 31,
  2000....................... $897  $80,656       $(73,043)   $(203)    $8,307
                              --------------------------------------------------

Exercise of options for
  1,176 shares of Common
  Stock......................  $11     $892              -        -       $903
Issuance of 68 shares of
  Common Stock in exchange
  for services...............    1       57              -        -         58
Foreign currency translation
  adjustment.................    -        -              -        7          7
Net loss.....................    -        -         (3,215)       -     (3,215)
                              --------------------------------------------------
 Balances as of December 31,
  2001....................... $909  $81,605       $(76,258)   $(196)    $6,060
                             ---------------------------------------------------



           See accompanying Notes to Consolidated Financial Statements

                                      F-4
<PAGE>
                     Communication Intelligence Corporation
                      Consolidated Statements of Cash Flows
                                 (In thousands)

                                                Years ended December 31,
                                       -----------------------------------------
                                           2001          2000          1999
                                       -----------------------------------------

Cash flows from operating activities
Net loss............................   $  (3,215)    $  (1,799)    $  (1,740)
Adjustments to reconcile net loss to
  net cash used in operating
  activities:
  Depreciation and amortization.....         687           328           334
  Equity securities issued for
  services..........................          58             -             -
  Non-cash compensation.............          46            89             -
 (Gain) loss on disposal of property
  and equipment.................               -             -            (1)
  Changes in operating assets and
    liabilities
    Accounts receivable, net.........         717          (185)         (429)
    Inventories......................          42           (90)           (7)
    Prepaid expenses and other current
    assets...........................         135           (95)          (72)
    Other assets.....................         (14)           48           (49)
    Accounts payable.................        (469)          390          (184)
    Accrued compensation.............         (55)           (3)           38
    Other accrued liabilities........        (117)         (176)           70
    Deferred revenue.................          26            26          (616)
                                       ------------- ------------- -------------
Net cash used in operating activities.     (2,159)       (1,467)       (2,656)
                                       ------------- ------------- -------------

Cash flows from investing activities
Acquisition of property and equipment.        (58)         (636)          (78)
Acquisition of property through
capital leases......................            -             2            17
                                       ------------- ------------- -------------
Net cash used in investing activities.        (58)         (634)          (61)
                                       ------------- ------------- -------------

Cash flows from financing activities
Proceeds from issuance of short-term
debt.................................         181           120            96
Proceeds from issuance of long-term
debt - related party.................       3,000             -         1,500
Restricted cash related to short-term
debt.................................           -             -           250
Principal payments on short-term debt        (120)          (60)         (181)
Principal payments on short-term debt      (1,500)            -             -
Principal payments on capital lease
obligations.........................           (8)           (4)          (5)
Proceeds from exercise of warrants...           -            437          800
Proceeds from exercise of stock options        903         1,583        1,836
                                       ------------- ------------- -------------
Net cash provided by (used in)
financing activities.................        2,456         2,076         4,296
                                       ------------- ------------- -------------
Effect of exchange rate changes on
cash.............................                -             -             -

Net increase (decrease) in cash and
cash equivalents....................           239           (25)        1,579
Cash and cash equivalents at
beginning of year...................         2,349          2,374          795
                                       ------------- ------------- -------------
Cash and cash equivalents at end
of year............................      $   2,588     $   2,349     $   2,374
                                       ============= ============= =============

           See accompanying Notes to Consolidated Financial Statements

                                      F-5
<PAGE>


                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

1.   Nature of Business,  Basis of Presentation  and Summary of Significant
     Accounting Policies

The Company

     Communication  Intelligence  Corporation  (the "Company" or "CIC") develops
and markets natural input and biometric  electronic signature solutions aimed at
the emerging markets such as, e-commerce, wireless Internet/information devices,
and corporate  security.  These emerging  markets for CIC's products include all
areas of personal computing, as well as electronic commerce and communications.

     The  Company's  research  and  development  activities  have  given rise to
numerous  technologies  and  products.   The  Company's  core  technologies  are
classified  into  two  broad  categories:   "natural  input   technologies"  and
"transaction  and  communication  enabling  technologies".  CIC's  natural input
technologies are designed to allow users to interact with a computer or handheld
device through the use of an electronic pen or "stylus".  Such products  include
the  Company's   multi-lingual   Handwriter(R)   Recognition   System,  and  its
Handwriter(R)  for  Windows(R)  family  of  desktop  computing  products.  CIC's
transaction  and  communication   enabling  technologies  provide  a  means  for
protecting  electronic  transactions and discretionary  communications.  CIC has
developed  products  for dynamic  signature  verification,  electronic  ink data
compression  and encryption and a suite of  development  tools and  applications
which the Company believes could increase the functionality of its core products
and facilitate their integration into original equipment  manufacturers' ("OEM")
hardware products and computer systems and networks.

     Through its 90% owned joint  venture in China (the  "Joint  Venture"),  the
Company provides system integration  services and markets its pen-based business
computer  systems  to  Chinese  businesses,  government  users and  other  joint
ventures.

     For the  five-year  period ended  December 31, 2001,  the Company  incurred
aggregate  losses  of  $27,286,   and,  at  December  31,  2001,  the  Company's
accumulated deficit was approximately  $76,258. The Company has primarily funded
these losses through the sale of debt and equity securities.

     As of December 31, 2001,  the Company's  principal  source of liquidity was
its cash and cash equivalents of $2,588. Although there can be no assurance, the
Company believes that its current  resources,  together with expected  revenues,
will  provide  sufficient  funds for  planned  operations  for at least the next
twelve months.  However, if the Company is unable to generate adequate cash flow
from sales,  or if  expenditures  required to achieve  the  Company's  plans are
greater than expected, the Company may need to obtain additional funds or reduce
discretionary  spending.  Management  believes  that it  will be able to  reduce
discretionary spending if required.

Basis of Consolidation

     The  accompanying   consolidated   financial  statements  are  prepared  in
accordance  with  generally  accepted  accounting  principles,  and  include the
accounts  of CIC and its 90% owned  Joint  Venture in the  People's  Republic of
China. All  inter-company  accounts and transactions  have been eliminated.  All
amounts  shown in the  accompanying  financial  statement  are in  thousands  of
dollars except per share amounts.

Use of Estimates

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect the  reported  amounts of assets and  liabilities,  and
disclosure of contingent  assets and  liabilities,  at the date of the financial
statements,  as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.

Reclassification

     The  revenues   have  been   reclassified   to  conform  with  the  current
year presentation.


                                      F-6
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

1.   Nature  of   Business,   Basis  of   Presentation   and   Summary   of
     SignificantAccounting Policies (continued)

Fair Value of Financial Instruments

     The carrying amounts of the Company's financial instruments, including cash
and cash  equivalents,  restricted cash, and short-term  debt,  approximate fair
value due to their short maturities.

Cash and Cash Equivalents

     The Company  considers all highly liquid  investments  with maturity at the
date of purchase of three months or less to be cash equivalents.

     Short-term  investments  are  classified as  "available-for-sale."  For all
periods presented,  cost of investments approximated fair market value. The cost
of securities sold is based on the specific  identification  method. The Company
had no short-term investments as of December 31, 2001 or 2000.

        The Company's cash and cash equivalents,
       at December 31, consisted of the following:

                                                           2001        2000
                                                        ----------- ------------

Cash in bank.............................. .........    $  1,621    $  1,332
Commercial paper....................................          26         687
Money markets.......................................         941         330
                                                        ----------- ------------


  Cash and cash equivalents........................     $  2,588    $  2,349
                                                        =========== ============
Concentrations of Credit Risk

     Financial  instruments that potentially  subject the Company to significant
concentrations  of credit risk  consist  primarily  of cash,  cash  equivalents,
restricted cash,  short-term  investments and accounts  receivable.  The Company
maintains its cash,  cash  equivalents and short-term  investments  with various
financial institutions.  This diversification of risk is consistent with Company
policy to maintain liquidity, and mitigate against risk of loss as to principal.
Although such amounts may exceed the F. D. I. C. limits,  the Company limits the
amount of credit  exposure with any one financial  institution and believes that
no significant concentration of credit risk exists with respect to cash and cash
equivalents.

     At December  31, 2001,  the Joint  Venture had  approximately  $802 in cash
accounts held by a financial  institution in the People's Republic of China. The
Joint Venture deposits are not covered by any federal deposit  insurance program
that is comparable to the programs applicable to U.S. deposits.

     To date,  accounts  receivable have been derived  principally from revenues
earned from end users,  manufacturers,  retailers and  distributors  of computer
products in North  America,  Europe and the Pacific  Rim.  The Company  performs
periodic credit evaluations of its customers,  and does not require  collateral.
The Company maintains reserves for potential credit losses;  historically,  such
losses have been insignificant and within management's expectations.

     Six customers  accounted for approximately 62% of gross accounts receivable
at December 31, 2001. Eleven customers  accounted for approximately 72% of gross
accounts receivable at December 31, 2000.

Inventories

     Inventories  are  stated  at the  lower  of  cost  or  market,  cost  being
determined  using the  first-in  first-out  ("FIFO")  method.  Cost  principally
includes direct materials.  At December 31, 2001 and 2000, inventories consisted
of finished goods.

                                      F-7
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

1.   Nature of Business,  Basis of Presentation  and Summary of Significant
     Accounting Policies (continued)

Property and Equipment, Net

     Property and equipment are stated at cost.  Depreciation  is computed using
the straight-line  method over the estimated useful lives of the related assets,
ranging from three to five years.  Leasehold  improvements  are  amortized  over
their estimated  useful lives,  not to exceed the term of the related lease. The
cost of additions and improvements is capitalized, while maintenance and repairs
are charged to expense as incurred. Depreciation expense was $140, $166 and $190
for the year ended December 31, 2001, 2000 and 1999, respectively.

     Property and equipment, net at December 31, consists of the following:

                                                           2001         2000
                                                       ------------ ------------

Machinery and equipment...............................    $1,224       $1,191
Office furniture and fixtures.........................       448          448
Leasehold improvements................................        84           84
Purchased software....................................       206          174
                                                       ------------ ------------
                                                           1,962        1,897
Less accumulated depreciation and amortization........    (1,801)      (1,635)
                                                       ------------ ------------
                                                         $   161      $   262
                                                       ============ ============

     Included in property and equipment as of December 31, 2001, and 2000 is $42
and $42,  respectively,  of assets  acquired under capital  leases.  Accumulated
depreciation  on such assets  totaled $38 and $32 at December 31, 2001 and 2000,
respectively.

Patents

     On October 6, 2000, a  wholly-owned  subsidiary  of the  Company,  acquired
certain assets of PenOp Limited (PenOp) and its subsidiary  PenOp Inc.  pursuant
to an asset  purchase  agreement  dated as of September  29,  2000.  Patents are
stated at cost less  accumulated  amortization  which in Managements  opinion is
less than fair value.  Amortization is computed using the  straight-line  method
over the estimated lives of the related  assets,  ranging from five to seventeen
years.  Amortization  expense was $436, $43 and $15 for the years ended December
31, 2001, 2000 and 1999, respectively.

     Patents, net at December 31, consists of the following:

                                 Expiration     Life         2001         2000
                                ----------     ----   ------------ ------------
Patent......................      Various         5       $   9      $     9
Patent......................      Various         7         476          476
Patent......................         2013        13          93           93
Patent......................         2014        14         187          187
Patent......................         2015        15         373          373
Patent......................         2017        17        5607        5,607
                                                       ------------ ------------
                                                           6745        6,745
Less accumulated amortization..........                    (946)        (511)
                                                       ------------ ------------
                                                        $  5,799      $ 6,234
                                                       ============ ============

                                     F-8
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

1.   Nature of Business,  Basis of Presentation  and Summary of Significant
     Accounting Policies (continued)

Long-Lived Assets

     The Company evaluates the  recoverability of its long-lived assets whenever
circumstances  or events  indicate  such assets might be  impaired.  The Company
would  recognize an  impairment  reserve in the event the net book value of such
assets exceeded the future  undiscounted cash flows attributable to such assets.
No such reserves have been recorded in the three years ended December 31, 2001.

Software Development Costs

     The Company capitalizes  software  development costs upon the establishment
of technological  feasibility,  subject to net realizable value  considerations.
Capitalization  commences  upon the  completion  of a working  model and ends on
general  product  release.  As of December  31,  2001 and 2000,  such costs were
insignificant  and  are  included  as a  component  of  "other  assets"  in  the
accompanying  consolidated  balance  sheets.  Amortization  expense  related  to
capitalized  software  development costs in 2001, 2000 and 1999 amounted to $12,
$12 and $1, respectively.

Stock-Based Compensation

     Effective  January 1, 1996,  the Company  adopted  Statement  of  Financial
Accounting Standards No. 123,  "Accounting for Stock-Based  Compensation" ("SFAS
123").  The Company has  elected to  continue to use the  intrinsic  value based
method of Accounting Principles Board Opinion No. 25, as allowed under SFAS 123,
to account for its employee stock-based compensation plans. The Company complies
with the disclosure provisions of SFAS 123.

Revenue Recognition

     In October 1997,  the American  Institute of Certified  Public  Accountants
(the  "AICPA")  issued  Statement  of  Position  No.  97-2,   "Software  Revenue
Recognition"  ("SOP  97-2"),  which the Company  has  adopted  for  transactions
entered into during the fiscal year beginning January 1, 1998. SOP 97-2 provides
guidance  for  recognizing  revenue  on  software  transactions  and  supersedes
Statement of Position No. 91-1, "Software Revenue  Recognition".  In March 1998,
the AICPA issued Statement of Position No. 98-4, "Deferral of the Effective Date
of a Provision of SOP 97-2, Software Revenue Recognition" ("SOP 98-4"). SOP 98-4
defers,  for one year,  the  application  of certain  passages in SOP 97-2 which
limit what is considered  vendor-specific  objective evidence ("VSOE") necessary
to recognize revenue for software licenses in multiple-element arrangements when
undelivered  elements  exist.  In December 1998,  the AICPA issued  Statement of
Position  No. 98-9 ("SOP  98-9")  Modifications  of SOP 97-2,  Software  Revenue
Recognition,  With  Respect  to  Certain  Transactions."  SOP 98-9  extends  the
effective date of SOP 98-4 and provides additional  interpretative guidance. SOP
98-9 is effective for fiscal years  beginning  after March 15, 2000. The Company
also follows the  interpretive  guidance of SAB 101 issued by The Securities and
Exchange  Commission  and EITF issue  00-21 of the AICPA  Emerging  Issues  Task
Force.

Online Revenue

     Revenue from retail  product sales is recognized  upon sell through,  while
revenue from other product sales is  recognized  upon shipment  provided that no
significant obligations remain and the collection of the resulting receivable is
probable.  The  Company  provides  for  estimated  sales  returns at the time of
shipment.

Corporate Revenue

     License  revenues are  recognized  when the software has been delivered and
when all significant  obligations have been met. Royalty revenues are recognized
as products are licensed/sold by licensees. Deferred revenue in the accompanying
balance  sheets  reflects  service  contract  fees  received  from the Company's
licensees in advance of revenue being earned.


                                      F-9
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

1.   Nature of Business,  Basis of Presentation  and Summary of Significant
     Accounting Policies (continued)

Corporate Revenue (continued)

     Development  contracts  revenue is generated  primarily from  non-recurring
engineering  activities  and  research  grants  from  licensees  and  government
agencies.  Revenue is recognized in accordance  with the terms of the grants and
agreements,  generally  when  collection is probable and related costs have been
incurred.

   China Joint Venture Revenue

     Revenue from system integration activities and product sales are recognized
upon shipment provided that no significant obligations remain and the collection
of the resulting receivable is probable.

     Three customers accounted for 13%, 9% and 7%, respectively,  of revenues in
2001. Three customers accounted for 16%, 6% and 5%, respectively, of revenues in
2000.  One customer  accounted for 27% of revenues in 1999.  No other  customers
accounted for greater than 10% of revenues in 2001, 2000 and 1999.

Research and Development

     Research and development costs are charged to expense as incurred.

Advertising

     The Company expenses advertising costs as incurred. Advertising expense for
the year  ended  December  31,  2001,  2000,  and 1999 was $203,  $399 and $140,
respectively.

Net Loss Per Share

     The Company calculates earnings per share under the provisions of Statement
of Financial  Accounting  Standards No. 128,  "Earnings Per Share" ("SFAS 128").
SFAS 128  requires the  disclosure  of both basic  earnings per share,  which is
based on the weighted average number of shares outstanding, and diluted earnings
per share,  which is based on the weighted average number of shares and dilutive
potential  shares  outstanding.  For the year ended December 31, 2001,  2000 and
1999  potential  equivalent  shares  excluded  from the  calculation  of diluted
earnings per share,  as their effect is not  dilutive,  include stock options of
7,027,  8,145 and 9,956 of equivalent shares and of warrants of 237, 237 and 876
equivalent shares, respectively.

Foreign Currency Translation

     The Company considers the functional  currency of the Chinese Joint Venture
to be the local currency and, accordingly, gains and losses from the translation
of the local foreign currency  financial  statements are included as a component
of  "accumulated  other  comprehensive  loss" in the  accompanying  consolidated
balance sheets. Foreign currency assets and liabilities are translated into U.S.
dollars at the end-of-period  exchange rates except for non-monetary  assets and
liabilities,  which are translated at historical  exchange  rates.  Revenues and
expenses are  translated  at the average  exchange  rates in effect  during each
period  except for those  expenses  related to balance  sheet  amounts which are
translated at historical exchange rates.

     Net foreign currency transaction gains and losses are included in "interest
income  and  other  income  (expense),  net"  in the  accompanying  consolidated
statements  of  operations.   The  Company   recorded  a  net  foreign  currency
transaction  gain of $59 for the year ended December 31, 1999.  Foreign currency
transaction gains in 2001 and 2000 were insignificant.

                                      F-10
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

1.   Nature of Business,  Basis of Presentation  and Summary of Significant
     Accounting Policies (continued)

Income Taxes

     Deferred tax assets and  liabilities  are  recognized  for the expected tax
consequences  of  temporary  differences  between  the tax bases of  assets  and
liabilities and their financial  statement reported amounts and for tax loss and
credit  carryforwards.  A valuation  allowance is provided  against deferred tax
assets when it is  determined to be more likely than not that the asset will not
be realized.

Acquisition of Assets From PenOp

     On  October  6,  2000,  a  wholly-owned  subsidiary  of the  Company,  (the
"Buyer"),  acquired certain assets of PenOp Limited ("PenOp") and its subsidiary
PenOp  Inc.,  (collectively,  the  "Sellers")  pursuant  to  an  asset  purchase
agreement dated as of September 29, 2000, by and among Buyer and the Sellers for
4.7 million  shares of common stock of the Company (the  "Acquisition").  Out of
the 4.7 million  shares  issued to Sellers in connection  with the  Acquisition,
approximately  940,000 shares are being held in escrow to cover  indemnification
of Buyer.  The  Company  ascribed a value of $5,728 to the assets  which will be
charged to income  over the  estimated  lives of the assets,  five to  seventeen
years.

     Pursuant  to the  asset  purchase  agreement,  the  Company  agreed  to use
reasonable efforts to file a Registration  Statement under the Securities Act of
1933,  as amended (the "Act"),  covering the sale of the  Transaction  Shares no
later than thirty (30) days from closing and to use  reasonable  efforts to have
the Registration Statement declared effective as soon as practicable thereafter.
The registration statement was declared effective on November 22, 2000.

     Subsequent  to the  closing,  an officer  and  Chairman of the Board of the
Company at that time, and his designees,  purchased in a private  transaction an
aggregate of 1,713,728  shares of common stock received by Sellers in connection
with the Acquisition for $3.3 million.

New Accounting Pronouncements

     In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business  Combinations." SFAS No. 141 supersedes Accounting Principles
Board ("APB") No. 16 and requires that business  combinations entered into after
June 20, 2001 be accounted  for as using the purchase  method,  eliminating  the
pooling-of-interest  method  defined in APB 16. The  statement is effective  for
business  combinations  initiated  after  June 30,  2001 and shall  apply to all
business combinations accounted for by the purchase method for which the date of
acquisition is July 1, 2001 or later. The Company believes that adoption of FASB
No. 141 will not have a material  impact on its  current  financial  position or
results of operations.

     In  July  2001,  the  FASB  issued  SFAS  No.  142,   "Goodwill  and  Other
Intangibles".  SFAS No. 142 addresses the initial  recognition,  measurement and
amortization of intangible  assets acquired  individually or in a group of other
assets (not acquired in a business  combination)  and addresses the amortization
provisions for excess cost over fair value of net assets or  intangibles  assets
acquired in a business combination.  The statement is effective for fiscal years
beginning  after  December  15,  2001,  and is  effective  July 1,  2001 for any
intangibles  acquired in a business  combination  initiated after June 30, 2001.
The Company is  evaluating  the effect,  if any, on its  financial  position and
results of operations  arising from the issuance of SFAS No. 142,  "Goodwill and
Other Intangibles."

     In  October  2001,  the FASB  issued  SFAS  No.  144,  "Accounting  for the
Impairment  or Disposal  of  Long-Lived  Assets.  " SFAS No. 144  addresses  the
accounting  and reporting for the  impairment or disposal of long-lived  assets.
The statement  provides a single  accounting  model for long-lived  assets to be
disposed  of.  New  criteria  must be met to  classify  the  asset  as an  asset
held-for-sale.  SFAS No. 144 also focuses on reporting the effects of a disposal
of a segment of a business. Statement SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001. The Company does not expect SFAS No. 144 will
have a  material  impact on the  Company's  financial  position  or  results  of
operations at this time.

     In January 2001, the Financial Accounting Standards Board's Emerging Issues
Task Force (EITF) issued EITF Issue No. 00-27  effective for convertible  debt


                                      F-11
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

1.   Nature of Business,  Basis of Presentation  and Summary of Significant
     Accounting Policies (continued)

instruments issued after November 16, 2000. This pronouncement  requires the use
of the intrinsic  value method for  recognition  of the  detachable and imbedded
equity features  included with  indebtedness,  and requires  amortization of the
amount  associated  with the  convertibility  feature  over the life of the debt
instrument  rather  than the  period  for  which  the  instrument  first  became
convertible.  The  Company  does not  expect  EITF  Issue No.  00-27 will have a
material impact on the Company's  financial position or results of operations at
this time.


2. Chinese Joint Venture

     The Company  currently  owns 90% of a joint  venture  with the  Information
Industry  Bureau of the Jiangsu  Province,  a provincial  agency of the People's
Republic of China (the  "Agency").  In June 1998, the registered  capital of the
Joint Venture was reduced from $10,000 to $2,550.  As of December 31, 2001,  the
Company had  contributed an aggregate of $1,800 in cash to the Joint Venture and
provided it with non-exclusive licenses to technologies and certain distribution
rights and the Agency had  contributed  certain land use rights.  Following  the
reduction in registered  capital of the Joint  Venture,  neither the Company nor
the Agency are  required to make  further  contributions  to the Joint  Venture.
Prior to the  reduction in the amount of registered  capital,  the Joint Venture
was subject to the annual  licensing  requirements  of the  Chinese  government.
Concurrent  with the  reduction  in  registered  capital,  the  Joint  Venture's
business license has been renewed through October 18, 2043.

3. Comprehensive Income

     In June 1997, the Financial  Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting  Comprehensive Income" ("SFAS
130"). The Company adopted SFAS 130 effective January 1, 1998. SFAS 130 requires
that  all  items  recognized   under  accounting   standards  as  components  of
comprehensive earnings be reported in an annual statement that is displayed with
the same prominence as other annual financial statements. SFAS 130 also requires
that an entity classify items as other comprehensive earnings by their nature in
an annual financial  statement.  For example,  other comprehensive  earnings may
include foreign  currency  translation  adjustments,  minimum pension  liability
adjustments, and unrealized gains and losses on marketable securities classified
as  available-for-sale.  Annual financial statements for prior periods have been
reclassified, as required.

     The  accumulated  other  comprehensive  loss at December  31, 2001 and 2000
consisted of cumulative foreign currency translation adjustments.

4. Short-term Debt

     On August 23, 2001,  the  Company's  90% owned Joint  Venture  borrowed the
aggregate  equivalent of $181,  denominated in Chinese currency,  from a Chinese
bank. The loan bears interest at 5.37% per annum and is due August 23, 2002. The
borrowing did not require the Joint Venture to deposit a compensating balance.

     On September 1, and  September  19, 2000,  respectively,  the Company's 90%
owned Joint Venture borrowed,  in two transactions,  the aggregate equivalent of
$121,  denominated  in Chinese  currency,  from a Chinese  bank.  The loans bear
interest at 5.12%.  The borrowings did not require a compensating  balance.  The
loans were paid in March 2001.

     Interest expense for the years ending December 31, 2001, 2000, and 1999 was
$281,  $266, and $53,  respectively.  Interest  expense  associated with related
party debt was $274,  $258 and $53 for the years ended  December 31, 2001,  2000
and 1999, respectively.

5. Related Party Transactions

     In  April  1994,  the  Company  loaned  $210 to the  Company's  then  Chief
Executive  Officer in exchange  for a note,  secured by shares of the  Company's
Common Stock,  bearing  interest at the lesser of the highest  marginal rate per
annum  applicable to the Company's  borrowings or the highest rate  allowable by
law (10% per annum at  December  31,  1997).  On August 14,  1998,  the  Company
entered into an  employment  agreement  (the  "Employment  Agreement")  with the

                                      F-12
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

5. Related Party Transactions (continued)

aforementioned  former  officer.  Under the  Employment  Agreement,  the  former
officer provided  consulting  services to the Company through December 15, 2001.
In exchange for these services, $110 of the note receivable from the officer was
forgiven  on a monthly  basis over the  period  commencing  August 15,  1998 and
ending  December  15,  2001.  Per the  terms of the  employment  agreement,  the
remaining $100 of the note  receivable from the officer was forgiven on December
15, 2001.

     On June 16, 1999, the Company obtained a bridge loan (the "Bridge Loan") in
the amount of $500 from a charitable remainder annuity trust, a trustee of which
was then a director and officer of the Company. The Bridge Loan was increased by
$150 and $100 in August and September 1999,  respectively.  Amounts  outstanding
under the  Bridge  Loan bore  interest  at the prime  rate plus 2%. The loan was
secured by the Company's cash, accounts receivable and other receivables as then
owned or  thereafter  acquired  by the  Company.  The Bridge  Loan plus  accrued
interest  was due  December  31,  1999.  In October  1999,  the Bridge  Loan was
converted to long-term debt as discussed below.

     On October 20, 1999,  the Company  entered into a loan  agreement  with the
same charitable  remainder annuity trust,  whereby the then existing Bridge Loan
of $750 was  converted  into a long term loan in the amount of $1,500 (the "1999
Loan"). The 1999 Loan is secured by a first priority security interest in all of
the Company's assets as now owned or hereafter acquired by the Company. The 1999
Loan  bore  interest  at the  rate of 2% over the  prime  rate as  published  by
Citibank  from time to time.  The note had a due date of January  31,  2002.  In
connection  with the 1999 Loan the Company  issued to the  charitable  remainder
annuity trust warrants to purchase 300 shares of the Company's common stock. The
warrants had an exercise price of $1.09 per share.  The Company ascribed a value
of $179 to these  warrants,  which was  amortized  to the  Company's  results of
operations  over the life of the debt.  The fair value  ascribed to the warrants
was estimated on the date of issuance using the Black-Scholes pricing model with
the following assumptions:  risk-free interest rate of 5.50%; expected life of 2
years; expected volatility of 99%; and expected dividend yield of 0%. On January
20, 2000, the charitable  remainder  trust  exercised all 300 warrants issued in
connection with the $1,500 long-term debt. The warrants were exercised under the
cashless  exercise  provision in the warrant  agreement.  The Company issued 255
shares of common stock in exchange for the 300 warrants.  The 1999 Loan was paid
off June 19, 2001 as discussed below.

     On June 19, 2001, the Company consummated a three-year $3 million financing
(the "Loan") with the charitable remainder annuity trust, a trustee of which was
then a director  and officer of the Company (the  "Trust").  The proceeds of the
Loan were used to  refinance  $1,500 of  indebtedness  outstanding  to the Trust
pursuant  to a loan made by the Trust to the  Company  in  October  1999 and for
working  capital  purposes.  The Loan is  secured by a first  priority  security
interest in all of the  Company's  assets as now owned or hereafter  acquired by
the  Company.  The Loan  bears  interest  at the rate of 2% over the prime  rate
publicly  announced  by  Citibank  N. A. from time to time,  which was 8.00% per
annum at September 30, 2001,  and is due June 18, 2004. The Loan may be pre-paid
by the Company in whole or in part at any time without  penalty,  subject to the
right of the Trust to convert the outstanding  principal amount of the Loan into
shares of common  stock.  Pursuant  to the terms of the Loan,  the Trust has the
option,  at any time prior to  maturity,  to convert  all or any  portion of the
outstanding  principal  amount  of the Loan into  shares of common  stock of the
Company at a conversion price of $2.00 per share, subject to adjustment upon the
occurrence  of certain  events.  If, prior to maturity of the Loan,  the Company
consummates  one or more  financings  providing  $5  million  or  more in  gross
proceeds,  the Company is required to apply 50% of the  proceeds in excess of $5
million to the then outstanding principal amount of the Loan.

     In connection with the Loan, the Company entered into a registration rights
agreement  with the Trust which  obligates  the  Company to file a  registration
statement with the Securities and Exchange  Commission  covering the sale of the
shares of the Company's  common stock issuable upon conversion of the Loan if it
receives a demand by the holder of the Loan to do so, and to use its  reasonable
best efforts to cause such registration statement to become effective.

     In  2001,  2000,  and  1999,  $150 in  consulting  fees,  including  office
expenses, were paid to a party who, at that time, was a director of the Company.


                                      F-13
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

5. Related Party Transactions (continued)

     During the fourth quarter of 2000 the Company engaged in a transaction with
PenOp  (See  Note  1)  to  provide   nonrecurring   maintenance   services  from
pre-existing  PenOp  contracts  in the  aggregate  amount of $1.5  million.  The
Company recorded $877 and $352 in nonrecurring  maintenance  services during the
fourth quarter of 2000 and the first quarter of 2001,  respectively,  (net). The
Company  previously  entered  into  a  separate  transaction,   to  acquire  the
intellectual property rights from PenOp.

     Subsequent to the closing of the  Acquisition  (See Note 1), an officer and
Chairman of the Board of the Company at that time, and his designees,  purchased
in a private  transaction  an  aggregate  of  1,713,728  shares of common  stock
received by Sellers in connection with the Acquisition for $3.3 million.

6. Stockholders' Equity

Common Stock Options

     The Company  adopted two stock  option plans in 1991 (the 1991 Stock Option
Plan and the 1991  Non-discretionary  Plan,  collectively,  the  "1991  Plans").
Incentive  and  non-qualified  options  under the 1991  Plans may be  granted to
employees, officers, and consultants of the Company. As amended, there are 2,050
shares of Common Stock authorized for issuance under the 1991 Plans. At December
31, 2001, 63 options are available for grant.  In late 1994 the Company  adopted
the 1994 Stock Option Plan (the "1994  Plan").  The 1994 Plan allows  directors,
officers and employees to be eligible for grants of incentive and  non-qualified
stock  options.  In May 1997,  the  stockholders  approved  an increase of 1,000
shares to the  number of shares  authorized  for  issuance  under the 1994 Plan.
Accordingly, a total of 6,000 shares of Common Stock are authorized for issuance
under the 1994 Plan.  The  exercise  prices of  options  under the 1994 Plan are
determined  by a  committee  of the Board of  Directors,  but, in the case of an
incentive stock option, the exercise price may not be less than 100% of the fair
market value of the underlying Common Stock on the date of grant.  Non-qualified
options may not have an exercise price of less than 85% of the fair market value
of the underlying Common Stock on the date of grant. Options under the 1994 Plan
generally  vest over four years.  For those  options which vest over four years,
20% of the total options  granted vest on the first  anniversary  of the date of
grant,  and an additional 20%, 20%, and 40% of the total options granted vest on
the second, third, and fourth anniversaries of the date of grant,  respectively.
Options  under  the 1994 Plan are  generally  exercisable  over a period  not to
exceed seven years. At December 31, 2001,  there were 433 options  available for
grant under the 1994 Plan.

     In December 1994, for services  rendered  options to purchase 180 shares of
Common Stock at $0.50 per share were  granted to three  directors of the Company
under non-plan option agreements. In addition, a non-plan option to purchase 100
shares of Common  Stock at $0.50 per share was granted on December 28, 1994 to a
newly  elected  director.  The newly  elected  director also received an option,
vesting one year from date of grant, to purchase 50 shares of Common Stock at an
exercise   price  of  $0.50   per  share   pursuant   to  the   Company's   1991
Non-discretionary Plan. The non-plan options generally vest over four years. For
those  non-plan  options which vest over four years,  20% of the total  non-plan
options  granted  vest on the  first  anniversary  of the date of  grant  and an
additional  20%, 20%, and 40% of the total non-plan  options granted vest on the
second,  third,  and fourth  anniversaries  of the date of grant,  respectively.
Non-plan  options are  generally  exercisable  over a period not to exceed seven
years. As of December 31, 2001,  3,585 non-plan  options were outstanding with a
weighted  average  exercise price of $0.88 per share. Of such non-plan  options,
3,167 were  exercisable  at December 31, 2001 with a weighted  average  exercise
price of $0.89 per share.

     In June 1999,  the Company  adopted and the  shareholders  approved a stock
option plan (the "1999  Plan").  Incentive and  non-qualified  options under the
1999 Plan may be granted to employees, officers, and consultants of the Company.
There are 2,000 shares of Common Stock  authorized  for issuance  under the 1999
Plan.  The options have a ten year lifeand  generally  vest quarterly over three
years.  At December  31,  2001,  there were 1,035  shares  available  for future
grants.


                                      F-14
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

6. Stockholders' Equity (continued)

Common Stock Options

     Information  with respect to the Company's 1991 Plans the 1994 Plan and the
1999 Plan is summarized below:

                                        Year Ended December 31,
                          ------------------------------------------------------
                                 2001                               2000
                          ------------------------------------------------------
                               Weighted                   Weighted
                               Average                    Average
                               Shares Exercise Price      Shares  Exercise Price
                          ------------------------------------------------------

Outstanding at
beginning of period..          3,257       $1.54          3,544         $1.02
Granted..............          1,367       $1.21            947         $3.19
Exercised............           (384)      $0.90           (757)        $0.85
Forfeited............           (798)      $1.53           (477)        $2.07
                              -------                    -------
Outstanding at period end..    3,442       $1.48          3,257         $1.54
                              =======                    =======
Options exercisable at
period end.......              2,208       $1.35          1,150         $1.27
                              =======                    =======
Weighted average grant-date
fair value of options
granted during the period...   $0.98                       $1.54
                              =======                     =======





     The following table summarizes  information about stock options outstanding
under the 1991 Plans, the 1994 Plan and the 1999 Plan at December 31, 2001:

                                                      Weighted Average
                                           -------------------------------------

                                                  Remaining
                             Options      Contractual Life (Years)
Range of Exercise Prices     Outstanding                          Exercise Price
--------------------------------------------------------------------------------

$0.00 - $0.50...............      24             3.8                   $0.47
$0.51 - $2.00...............   2,812             6.2                   $1.11
$2.01 - $2.99...............      58             7.8                   $2.32
$3.00 - $7.50...............     548             8.3                   $3.35
                            --------------
                                3,442
                            ==============

     The following table summarizes  information about stock options exercisable
under the 1991 Plans, the 1994 Plan and the 1999 Plan at December 31, 2001:

                                                                   Weighted
                                               Options              Average
Range of Exercise Prices                     Exercisable         Exercise Price
                                      ------------------------------------------
 $0.00 - $0.50.....................                12                 $0.47
 $0.51 - $2.00.....................             1,862                 $1.03
 $2.01 - $2.99.....................                56                 $2.30
 $3.00 - $7.50.....................               278                 $3.35
                                      -------------------
                                                2,208
                                      ===================

     Effective  January 1, 1996,  the Company  adopted  Statement  of  Financial
Accounting Standards No. 123,  "Accounting for Stock-Based  Compensation" ("SFAS
123").  The Company has  elected to  continue to use the  intrinsic  value based
method of Accounting Principles Board Opinion No. 25, as allowed under SFAS 123,
to account for its employee stock-based compensation plans. The Company complies
with the disclosure provisions of SFAS 123.


                                      F-15
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

6. Stockholders' Equity (continued)

Common Stock Options

     Had compensation  cost for the Company's option plans been determined based
on the fair value of the  options at the date of grant,  as  prescribed  by SFAS
123, the Company's net loss available to stockholders  and basic and diluted net
loss per share available to stockholders would have been as follows for the year
ended December 31:

                                           2001          2000          1999
                                     -------------------------------------------

Net loss available to
  stockholders:
  As reported........................  $ (3,215)     $ (1,799)      $ (1,740)
  Pro forma..........................  $ (4,743)     $ (3,937)      $ (3,316)
Basic and diluted net loss per share
  available to
  stockholders:
  As reported........................  $  (0.04)     $  (0.02)      $  (0.02)
  Pro forma..........................  $  (0.05)     $  (0.05)      $  (0.04)

     The fair value of each option grant is estimated on the date of grant using
the  Black-Scholes  option  pricing  model with the following  weighted  average
assumptions used for grants during the applicable  periods:  risk-free  interest
rate of 4.1% for 2001,  4.7% for 2000,  and 5.4% for 1999, an expected life of 6
years for 2001, 3.5 years for 2000, and 4 years for 1999, respectively; expected
volatility of 100% all periods and dividend yield of 0% for all periods.

     The Company expects to make additional option grants each year. The Company
believes the above pro forma disclosures are not representative of the pro forma
effects on reported results of operations to be expected in future periods.

Warrants

     On  March  28,  1997,  and  effective  as of  December  31,  1996,  holders
constituting  100% of the  then  issued  and  outstanding  shares  of  Series  A
Preferred  Stock  executed a waiver to certain  provisions  of the  registration
rights agreement (the "Agreement")  entered into in connection with the December
Private  Placement.  Under the  waiver,  these  holders  irrevocably  waived any
redemption  obligation  of the  Company  with  respect to its Series A Preferred
Stock in exchange  for the  issuance to the holders of warrants to purchase  the
300 shares of the  Company's  Common Stock,  allocated  amongst the holders on a
pro-rata  basis.  The  warrants  expire five years from the date of issuance and
have  an  exercise  price  of  $2.00  per  share,   subject  to  adjustment  for
anti-dilution. The Company has ascribed a value of $484 to these warrants, which
was recorded as an expense in the Company's  statement of operations  during the
first quarter of 1997.  The fair value ascribed to the warrants was estimated on
the date of issuance  using the  Black-Scholes  pricing model with the following
assumptions:  risk-free  interest  rate of  6.60%;  expected  life  of 5  years;
expected volatility of 104%; and expected dividend yield of 0%.

     On October 20, 1999, in connection  with the 1999 Loan (as defined below in
Note 6) the Company issued to a charitable  remainder  annuity trust warrants to
purchase 300 shares of the Company's common stock. The warrants expire two years
from the  effective  date of issuance  and have an  exercise  price of $1.09 per
share.  The  Company  ascribed  a value of $179 to these  warrants,  which  were
amortized to the Company's  results of operations  over the life of the warrant.
The fair value  ascribed to the warrants  was  estimated on the date of issuance
using the Black-Scholes pricing model with the following assumptions:  risk-free
interest rate of 5.50%;  expected life of 2 years;  expected  volatility of 99%;
and expected dividend yield of 0%.

     Warrants to purchase a total of 237 shares of Common Stock were outstanding
as of December 31, 2001, and have a weighted average remaining  contractual life
of 3 months and a weighted average exercise price of $2.00 per share.

     As of December  31, 2001,  7,264  shares of Common Stock were  reserved for
issuance upon exercise of outstanding options and warrants.

                                      F-16
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

7. Commitments

Operating Lease Commitments

     The Company  currently  leases its  principal  facilities  (the  "Principal
Offices) in Redwood Shores,  California,  pursuant to a sublease that expires in
2006. In addition, the Company subleased to third parties certain space adjacent
to  the  Principal  Offices  through  August  2001.  The  Joint  Venture  leases
approximately 1,000 square feet in Nanjing,  China. In addition to monthly rent,
the U.S.  facilities are subject to additional rental payments for utilities and
other costs above the base amount.  Facilities  rent  expense was  approximately
$443, $390, and $376 in 2001, 2000, and 1999, respectively.  Sublease income was
approximately  $35, $104, and $209 for the years ended December 31, 2001,  2000,
and 1999, respectively.

     Future  minimum lease  payments under  noncancelable  operating  leases are
approximately, $397,$408 ,$419, $430, and $407 for the years ending December 31,
2002,  2003, 2004, 2005 and 2006,  respectively.  The Company's rent expense was
reduced by approximately $35 in 2001 in connection with the subleases  described
above.  Future minimum payments  required under capital leases,  which expire in
2002, were insignificant at December 31, 2001.

8. Income Taxes

     As of December  31,  2001,  the Company  had  federal  net  operating  loss
carryforwards  available to reduce taxable income through 2012 of  approximately
$53,179.  The  Company  also had  federal  research  and  investment  tax credit
carryforwards of approximately $315 which expire at various dates through 2010.

   Deferred tax assets and liabilities at December 31, consist of the following:

                                                       2001          2000
                                                    ----------------------------
Deferred tax assets:
Net operating loss carryforwards................     $ 21,272       $20,192
Credit carryforwards............................          315           315
Deferred income.................................           13            13
Other, net......................................          775           782
                                                    ----------------------------


Total deferred tax assets.......................       22,375        21,602
                                                    ----------------------------


Valuation allowance..............................    (22,375)       (21,602)
                                                    ----------------------------


Net deferred tax assets.........................    $      -       $      -
                                                    ============================

     A full  valuation  allowance  has been  established  for the  Company's net
deferred tax assets since the  realization of such assets through the generation
of future taxable income is uncertain.

     Under the Tax Reform Act of 1986, the amounts of, and the benefit from, net
operating  losses and tax credit  carryforwards  may be  impaired  or limited in
certain  circumstances.  These circumstances  include, but are not limited to, a
cumulative stock ownership change of greater than 50%, as defined,  over a three
year period.  During 1997, the Company experienced stock ownership changes which
could  limit  the  utilization  of its  net  operating  loss  and  research  and
investment tax credit carryforwards in future periods.

9. Segment Information

     In June 1997, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards  No.  131,  "Disclosures  About  Segments of An
Enterprise and Related  Information"  ("SFAS 131"). SFAS 131 revises information
regarding the reporting of operating  segments and was required to be adopted in
periods  beginning  after December 15, 1997. It also  establishes  standards for
related  disclosures  about  products and services,  geographic  areas and major


                                      F-17
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

9. Segment Information (continued)

customers. The Company adopted SFAS 131 for the year ended December 31, 1998 and
the Company's  information  has been  stratified into two Segments - Handwriting
recognition software and Systems integration.

     The  accounting  policies  followed by the  segments  are the same as those
described  in the "Summary of  Significant  Accounting  Policies."  Segment data
includes revenues, as well as allocated  corporate-headquarters costs charged to
each of the operating segments.

     The Company identifies reportable segments by classifying revenues into two
categories   Handwriting   recognition  and  system   integration.   Handwriting
recognition  software  is  an  aggregate  of  three  revenue  categories,   OEM,
Enterprise and Online sales. All Handwriting  recognition  software is developed
around the Company's core technology. System integration represents the sale and
installation  of third party  computer  equipment  and systems  that utilize the
Company's products. All sales above represent sales to external customers.

     The table below presents information about reporting segments for the years
     ended December 31,:

                              Handwriting         Systems
                              Recognition       Integration         Total
                            ----------------- ---------------- -----------------

     2001 (Unaudited)
     Revenues                  $ 4,546            $ 1,401          $  5,947
     Loss from Operations      $(2,842)           $  (104)         $ (2,946)
     Total assets              $ 8,662            $ 1,410          $ 10,072
     Depreciation and
     amortization              $   662            $    25          $    687

     2000 (Unaudited)
     Revenues                  $ 5,401            $ 1,911          $  7,312
     Loss from Operations      $(1,594)           $   (13)         $ (1,607)
     Total assets              $ 9,896            $ 1,405          $ 11,301
     Depreciation and
     amortization              $   310            $    18          $    328

     1999 (Unaudited)
     Revenues                  $ 4,898            $ 1,620          $  6,518
     Loss from Operations      $(1,078)           $   (44)         $ (1,722)
     Total assets              $ 3,523            $ 1,440          $  4,963
     Depreciation and
     amortization              $   289            $    45          $    334

     The following table represents revenues and long-lived asset information by
     geographic location for the period ended December 31:

                           Revenues                       Long Lived Assets
              ------------------------------------------------------------------
                2001    2000        1999       2001        2000         1999
              ------------------------------------------------------------------

     U.S.    $ 4,223  $ 5,401    $ 4,898   $  6,113    $  6,430      $   261

     China     1,724    1,911      1,620         44          66           83

              ------------------------------------------------------------------
     Total   $ 5,947  $ 7,312    $ 6,518   $  6,157    $  6,496     $    344
           =====================================================================

     The Company's export sales from U.S.  operations were 16%, 36%, and 16%, of
     total revenues in 2001, 2000, and 1999, respectively.

                                      F-18
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

10. Statement of Cash Flows Data

                                                    December 31,
                                       -----------------------------------------
                                           2001        2000         1999
Schedule of non-cash transactions:

  Non-cash compensation................  $   46      $   89        $   -

  Equity securities issued for
  services.............................  $   58      $    -        $   -
  Intellectual property acquired in
  exchange for 4,700 shares of the
  Company's common stock...............  $    -      $ 5,728       $   -
  Fair market value of warrants in
  connection with long-term debt -
  related party........................  $    -      $     -       $ 176

10. Statement of Cash Flows Data (continued)

Supplemental disclosure of cash flow information:

     Interest paid in 2001, 2000, and 1999 was $196, $187, and $4, respectively.

11. Employee Benefit Plans

          The Company sponsors a 401(k) defined  contribution  plan covering all
     employees meeting certain eligibility  requirements.  Contributions made by
     the Company are determined annually by the Board of Directors. To date, the
     Company has made no contributions to this plan.

12. Quarterly information (Unaudited)

     The summarized  quarterly financial data presented below, in the opinion of
Management,  reflects all adjustments which are of a normal and recurring nature
necessary to present fairly the results of operations for the periods presented.



                            First       Second     Third     Fourth
                           Quarter      Quarter   Quarter    Quarter     Total
                           -------      -------   -------    -------    -------

2001 Unaudited
 Net Sales                $  1,618      $1,903    $   915     $1,511    $ 5,947
 Gross profit             $    996      $1,201    $   459     $1,051    $ 3,707
 Income (loss) before
 income taxes, and
 minority interest        $  (741)      $ (691)   $(1,228)    $ (552)   $(3,212)

 Net income (loss)        $  (741)      $ (693)   $(1,229)    $ (552)   $(3,215)

 Basic and diluted
 income (loss) per share  $ (0.01)      $(0.01)   $ (0.01)    $(0.01)   $ (0.04)



                                      F-19
<PAGE>

                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

12. Quarterly information (Unaudited)(continued)


                             First       Second     Third     Fourth
                            Quarter      Quarter   Quarter    Quarter    Total
                            -------      -------   -------    -------    ------

2000 Unaudited
   Net Sales                $ 1,377      $ 1,250    $2,346    $2,339    $ 7,312
   Gross profit             $   648      $   442    $1,649    $1,677    $ 4,416
   Income (loss) before
   income taxes, and
   minority interest        $  (889)     $(1,127)   $  107    $  112    $(1,797)

   Net income (loss)        $  (888)     $(1,127)   $  106    $  110    $(1,799)

   Basic and diluted
   income (loss) per share  $ (0.01)     $ (0.01)   $(0.00)   $(0.00)   $ (0.02)


1999 Unaudited
   Net Sales                $ 1,247      $1,436     $1,966    $1,869    $ 6,518
   Gross profit             $   617      $  903     $  831    $  850    $ 3,201
   Income (loss) before
   income taxes, and
   minority interest        $  (448)     $ (380)   $ (430)    $ (482)   $(1,740)

   Net income (loss)        $  (448)     $ (380)   $ (430)    $ (482)   $(1,740)

   Basic and diluted
   income (loss) per share  $ (0.01)     $(0.01)   $(0.01)    $(0.01)   $ (0.02)


13. Subsequent event

          In February 2002, Mr. Guido DiGregorio,  President & CEO was appointed
     Chairman,  President  & CEO.  Prior to Mr.  DiGregorio's  appointment,  Mr.
     Philip  Sassower  resigned  his  Chairmanship  and board  position  and Mr.
     Jeffrey Steiner also resigned from the board.


                                      F-20
<PAGE>


                                   SCHEDULE II

                     Communication Intelligence Corporation
                 Valuation and Qualifying Accounts and Reserves
                                 (In thousands)

Years Ended December 31, 1999, 2000, 2001

                                 Balance    Charged to             Balance
                             At Beginning   Costs and              At End
                                Of Period   Expense   Deductions   Of Period
Year ended December 31, 1999:
Accounts receivable reserves.......$174      $ 39         $(200)     $ 13

Year ended December 31, 2000:
Accounts receivable reserves.......$ 13      $108         $  (3)      $118

Year ended December 31, 2001:
Accounts receivable reserves.......$118      $ 78         $   -       $196



                                      S-1
<PAGE>